Failure to obtain financial assistance whitewash proves fatal to action for breach of pre-emptive rights

Collective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 demonstrates breadth and implications of the financial assistance restrictions

Where a company involves itself in a transaction that in some way facilitates the purchase of its own shares or the shares of a holding company (e.g. by paying for lawyers to execute the transaction, paying for due diligence costs or paying for the stamp duty or valuation costs on the transaction), it is important for directors to be cognisant that this may constitute financial assistance, which is prohibited under the Corporations Act 2001 (Cth) (Act) unless set up to comply with the requirements of section 260A(1) of the Act.

Examples of scenarios where issues of financial assistance should be considered could include:

  • where a sale of a company’s business turns into a sale of its shares and the company continues to pay for the advisers in the transaction;
  • where a company engages an investment banker to sell it shares for a commission and that commission is not reimbursed by shareholders;
  • where a company’s constitution or shareholders agreement requires the company to be involved in some way in the sale and purchase of its shares and the company’s involvement eases “the financial burden that would be involved in the process of acquisition”;1
  • where a company attempts to enforce the terms of its shareholders agreement (including any pre-emptive rights provision) for the benefit of some of its shareholders but at the company’s expense; and
  • where the drafting of a shareholders agreement at the cost of the company in some way improves a shareholder’s “net balance of financial advantage” in relation to the acquisition of its shares in the company.2

The recent High Court case of Connective Services Pty Ltd v Slea Pty Ltd highlights the incredibly broad reach of the financial assistance provisions which, although expressed to apply where a company financially assists a person to “acquire” shares, extends to “all conduct in connection with the process of acquiring the shares or units of shares.”3 Specifically, the court confirmed that the provisions do not require that an acquisition of shares actually takes place.4

Further, the case demonstrates the potentially unfortunate result of not complying with the financial assistance provisions, where proceedings for breach of certain pre-emptive rights provisions of a company constitution were stayed because the proceedings was brought against the offending shareholder and funded by the company itself (instead of the prejudiced shareholders) in circumstances where the company could not prove that there was no material prejudice to it, its shareholders as a whole or any shareholder individually (not just the shareholders collectively) by giving the financial assistance.

In regards to what constitutes material prejudice, the High Court commented that this simply:

“…requires an assessment of and comparison between the position before the giving of the financial assistance and the position after it to see whether the company or its shareholders or its ability to pay its creditors is in a worse position. It does not assist to gloss the concept of material prejudice by the introduction of further concepts, which themselves require further explanation, such as whether there has been a diminution of the assets of the company, whether there has been a transaction, or whether there was a net transfer of value to the person acquiring the shares” (emphasis added).5

This case is likely to limit the circumstances where a company’s board of directors can legitimately and objectively come to the conclusion that the relevant financial assistance will not materially prejudice the interests of the company or its shareholders or the company’s ability to pay its creditors.


1.Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 (Connective), [22].
2. Ibid.
3. Connective, [35].
4. Connective, [23].
5. Connective, [26].


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