How to avoid penalties for M&A financial assistance

One issue we have seen which frequently goes unnoticed until it becomes a problem is the provision of financial assistance as found within section 260A of the Corporations Act 2001 (Cth).

Created to prevent a company from financing the purchase of shares in itself, these provisions often catch many acts that may not immediately appear as obvious financial assistance. For example, cases have shown that the following can all be considered financial assistance:

• the company (or a subsidiary of) providing a security or guarantee for an acquirers finance
• the company forgiving any debts owed by an acquirer to the company or a subsidiary
• the company releasing the acquirer from an obligation
• the company making a dividend payment to the acquirer which is to close in time to the date of the acquisition, or
• a subsidiary of the company providing a loan to the acquirer.

Penalties can apply to both directors and advisers, so recognition of a potential financial assistance event should be front of mind.

What to do

Financial assistance can be authorised (and a breach avoided) with the use of one of the three exceptions found within the Corporations Act:

(a) showing the assistance does not materially prejudice the interests of the company or the shareholders, or the company’s ability to pay its debts

(b) having the assistance approved by shareholders, or

(c) showing the assistance is exempt under a section 260C exemption (which includes exemptions for share buy backs, employee share schemes and reductions in capital, among other things).

Option (a) can be difficult to prove, and is especially tricky for advisers as giving of incorrect advice (or the failure to advise at all) can result in adviser liability.

The exemptions under (c) only apply in limited circumstances. This leaves option (b) as the most certain method of ensuring compliance. This option of opting for shareholder approval is otherwise known as a ‘whitewash’.

Enacting a whitewash does require compliance with statutory timeframes, but is otherwise uncomplicated as the documents themselves can be deployed quickly.

How we can help

We have the experience to recognise financial assistance in all its forms, and the resources necessary to carry out a whitewash quickly and efficiently, with minimal effect on a transaction.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.