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Update on the Prohibition of a Company Assisting to Buy Their Shares

Section 260A (1) of the Corporations Act 2001 (Cth) places strict limits on when a company can provide financial assistance to enable a person to acquire shares in it. The recent High Court decision in Connective Services Pty Ltd v Slea Pty Ltd reveals the broad scope of that prohibition.

The case concerned two related companies (Companies) with identical pre-emption clauses in their constitutions. The clauses required any shares proposed to be sold by a shareholder to first be offered to existing shareholders. The Companies each had three shareholders. One shareholder, Slea Pty Ltd (Slea) owned a third of the Companies’ issued shares.

The two Companies sued Slea and the purchaser in the Victorian Supreme Court, seeking to compel Slea to offer its shares to their two other shareholders, as required under the constitutions. There was no evidence that the other affected shareholders were funding the Companies’ legal costs of the proceeding.

Slea and the purchaser then applied to the Court seeking to stay or dismiss these proceedings and to injunct the Companies from prosecuting the proceedings. They asserted that the Companies were in contravention of section 260A (1) as they were financially assisting the other shareholders to acquire shares, by conducting the proceedings at the Companies’ expense. In the Court of Appeal the injunction was granted. The Companies appealed.

The injunction provision in section 1324(1B) of the Corporations Act, unusually provides that in an application for an injunction for a breach of 260A (1) (a) the Court must assume the contravention, unless the company or person involved proves otherwise.

Section 260A only allows a company to financially assist a person to acquire shares in limited circumstances, being, relevantly:

  • If the giving of assistance does not materially prejudice:
    • the interests of the company or its shareholders; or
    • The company’s ability to pay its creditors; or,
  • If shareholders approve of the assistance, excluding the aided party, with prior notice to ASIC.

The concern of this section is to make its contravention a civil liability (or possibly a crime) for an officer knowingly involved in breaching the section.

The Court said that the materially prejudice test involved comparing the company’s position before and after the assistance, to see if a worse position resulted.

The conduct can be in connection with the process of an acquisition of shares. Acquisition can include issues or transfers of shares. Further, the Court gave examples of the giving of financial assistance by a company, such as:

  • Direct contribution to the share price;
  • Paying stamp duty;
  • Paying valuation costs; or,
  • Incurring due diligence costs to aid a share acquisition.

By the Companies doing so instead, they eased the burden on those shareholders. The Companies incurred legal costs, which will never all be recovered. The Companies did not satisfy the burden of proving that their conduct would not substantially prejudice the interests of the each of the Companies. The Court therefore affirmed the injunction against the Companies who were bringing the proceedings.

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This paper is a summary providing general information and is not specific legal advice.

 

For more details, please contact:

James Hamilton, Solicitor

(02) 9318 6423

james.hamilton@surrypartners.com.au

© Surry Partners Lawyers 2019

December 2019