One Transaction, Two Whitewashes: The Overlooked Financial Assistance Requirement

Written by Alexis Wilson

A financial assistance transaction can require more than one approval under section 260B of the Corporations Act 2001 (Cth) (‘the Act’) where the corporate structure involves an ultimate holding company.

Where a company is providing financial assistance in connection with the acquisition of shares in itself, it is relatively straightforward enough to identify the need for a financial assistance whitewash approval and to prepare the necessary shareholder and director approvals. However, the requirement of a whitewash cannot always be determined by looking only at the immediate entitles involved in the transaction.

Brief Overview of Whitewash

Under s 260A of the Act, a company must not financially assist a person to acquire shares in the company or its holding company if doing so would materially prejudice the company, its shareholders or its ability to pay its creditors. Financial assistance can arise in a variety of ways, including through loans, guarantees or the provision of security in connection with an acquisition.

However, s 260B provides a statutory pathway for a company to give financial assistance where the prescribed approval process is followed. This is commonly referred to as a “whitewash”. Broadly, the process requires the relevant company to:

1. identify the proposed financial assistance and determine whether it falls within the prohibition in s 260A;
2. obtain the required director and shareholder approvals in accordance with s 260B;
3. provide the required notice and explanatory material to shareholders and ASIC within the statutory timeframes; and
4. ensure the relevant approvals are obtained before the financial assistance is provided.

This is where the corporate structure becomes critical. A transaction may initially appear to require a single financial assistance whitewash, but further analysis of the group’s ownership structure may reveal that an additional approval is required at the ultimate holding company level. In practice, this can turn what appears to be a straightforward approval process into a transaction requiring multiple whitewashes, with corresponding implications for transaction timing and completion.

Overview of Ultimate Holding Company

The requirement for an additional approval arises because the Act does not limit its consideration of financial assistance to the company directly providing the assistance. The Act also considers the corporate structure that will exist immediately post the acquisition.

Under s 260B(3), where a company providing financial assistance will, immediately after the acquisition, have an Australian holding company that is an unlisted domestic corporation and is not itself a subsidiary of another domestic corporation, the financial assistance must also be approved by a special resolution of that holding company’s members. Importantly, this does not mean that the holding company itself must provide the financial assistance to the purchaser. Rather, the additional approval is required because the financial assistance is being provided by a company within the holding company’s corporate group. The Act therefore requires the members of the relevant ultimate holding company to approve the financial assistance being provided by its subsidiary.

The concept of an ultimate holding company then becomes important. The definition of an ultimate holding company under the Act is a body corporate that is a holding company of the relevant company but is not itself a subsidiary of another body corporate. Put simply, it is the company at the top of the relevant corporate chain, it controls the company in question and there is no company above it in the chain.

For example, consider Company A acquires all of the share in Company B, and Company B provides a guarantee to the financier funding the acquisition as security. Company B is the company providing the financial assistance and would ordinarily be the turn of events that would trigger the requirements of a whitewash.

However, immediately following the share acquisition, Company A will become the ultimate holding company of Company B. The analysis must therefore also consider whether Company A satisfies the requirements of s 260B(3). If it does, an additional shareholder approval at Company A level may be required.

This analysis can become more complicated where the purchaser of the shares is a corporate trustee. A company being the registered holder of shares does not necessarily mean that it constitutes a holding company for the purposes of the Act. Sections 46 and 48 of the Act become relevant when determining whether a body corporate is a subsidiary of another body corporate.

Where Shares Are Held on Trust

In a situation whether a body corporate is a subsidiary, shares and voting power held by another body corporate in a fiduciary capacity are disregarded. Accordingly, where a trustee company holds shares solely in its capacity as trustee, those shares may be disregarded when determining whether a holding company/subsidiary relationship exists.

This principle was considered by the Supreme Court of Queensland in Jones v Aussie Networks Pty Ltd [2014] QSC 126, in which the Court considered the effect of shares held by a corporate trustee when looking at whether a subsidiary relationship existed. In this case, Torque Securities Pty Ltd held all the shares in Australian Shareholder Centre Pty Ltd (“ASC”) as trustee for a trust, rather than for its own benefit. Section 48(2) of the Act applied, resulting in the shares held in a fiduciary capacity being excluded from the calculation. Consequently, ASC was not considered a subsidiary of Torque under s 46, as the holding of shares on trust did not amount to beneficial control or ownership for the purposes of the statutory subsidiary definition. This reinforced the principle that mere legal title to shares, absent beneficial ownership, is insufficient to create a subsidiary relationship under the Act when shares are held in trust.

From a practical perspective, however, a lender may still prefer to proceed with the additional approval even where there is a reasonable basis for concluding that s 260B(3) is not technically engaged because the shares are held by a trustee in a fiduciary capacity. This may be driven by the lender’s preference for certainty and completeness. Although, obtaining the additional approvals may produce a higher administrative burden, it can provide a degree of comfort that the acquisition is not subsequently challenged on the basis that shareholder approval of the ultimate holding company was not obtained and may also avoid uncertainty where the consequences of getting the analysis wrong could negatively affect a lender’s security position.

Why the Whitewash Evaluation Matters

The financial assistance whitewash process is not simply a procedural requirement to be addressed before completion. Identifying the correct approvals at the outset can be critical to the timing and successful completion of an acquisition, particularly where acquisition finance is involved. An incomplete or defective whitewash may affect the satisfaction of conditions precedent, the position of guarantees and security provided to a lender, and the ability to complete a transaction on time.

Accordingly, when structuring an acquisition involving financial assistance, it is important to consider the entire post-completion corporate structure, rather than simply the company providing the assistance and the immediate purchaser. If you are considering an acquisition involving financial assistance or require advice on the corporate approvals required for an acquisition financing structure, JHK Legal can assist with assessing the relevant requirements and ensuring the transaction is structured for an efficient and compliant transaction.