What is Whitewash Approval for Financial Assistance and when is it required?

There are certain requirements under the Corporations Act 2001 (Cth) (the Act) which restrict a company from providing financial assistance to someone looking to acquire its shares unless:

1.            The assistance does not materially prejudice the company and its shareholders; or

2.            The shareholders authorise it.

The term ‘financial assistance’ has a broad interpretation and will arise where the company:

• Provides a loan to the incoming shareholder to fund the share purchase;
• Offers a corporate guarantee under the loan to fund the share purchase; or
• Offers security over the company’s assets to support the loan to fund the share purchase.

The approval process by the shareholders is referred to as a ‘Whitewash Approval’ and is set out in Section 260B of the Act. This involves the shareholders of the company holding a meeting to approve the financial assistance and the lodging of various documents with ASIC prior to providing the Financial Assistance. However, there are timeframes prescribed under the Act and by ASIC which must be followed strictly to ensure the Whitewash Approval is effective.

The most significant timeframe imposed by ASIC is the requirement for the initial notification to ASIC to be lodged at least 22 days before the general meeting of shareholders is convened to approve the Financial Assistance.

Typically, where a bank or other financial institution is lending money to a person or entity for the purchase of shares in a company, and that company is providing a guarantee or security supporting the loan, the lender will request evidence of the Whitewash Approval process having been undertaken as a condition of providing finance.

The Whitewash Approval Process

The Whitewash Approval process requires the company to provide certain information to the shareholders about the proposed Financial Assistance, a general meeting to be convened approving the Financial Assistance by special resolution and the lodgement of various forms with ASIC.

The company must ensure that sufficient notice of the general meeting is provided to the shareholders in accordance with the provisions of its constitution. Unless the company’s constitution prescribes some other period, the Act requires not less than 21 days’ notice to be provided to shareholders before a general meeting can be held.

The notice of meeting must include an explanatory statement which sets out the important information required for the shareholder to consider whether to vote in favour of the resolution authorising the company to provide the financial assistance.

Once the general meeting has been convened and the shareholders have passed a special resolution approving the Financial Assistance, the company must notify ASIC of the resolution having been passed at least fourteen (14) days before the Financial Assistance can be provided.

What happens if Whitewash Approval is not obtained?

While the failure to comply with the Whitewash Approval process under the Act will not invalidate the transaction, it may expose the directors and parties involved to civil and criminal penalties, particularly where the failure to comply is dishonest.

Where there is a bank or financial institution lending money as part of the acquisition of shares, they will generally not release the finance to the incoming shareholder until evidence has been provided that the Whitewash Approval has been sought from shareholders. Therefore, the Whitewash Approval will need to be complied with before the transaction can proceed as a matter of practice.

How Coulter Legal can assist you

The process of obtaining Whitewash Approval to provide financial assistance can be complex and time sensitive.

If you are unsure about the process generally or require any assistance with navigating this process as part of your transaction, our experienced Corporate & Commercial team can assist you to advise on the process and to prepare the necessary documents to ensure compliance with the Act.