Is your company selling its shares as part of a sale of business or restructure? If so, the purchaser’s bank may ask for a guarantee and indemnity from your company supported by a security agreement over your company’s assets.
This is classed as financial assistance. While not as apparent as a loan, a guarantee and indemnity still provide a benefit to the purchaser at the potential detriment of your company.
Companies are generally not permitted to provide financial assistance to a person buying its shares unless they first obtain shareholder approval. Obtaining shareholder approval to provide a guarantee or loan to a purchaser is colloquially known as the “whitewash” process. This essentially turns a red light into a green light so that the transaction may proceed.
If a whitewash is required for your business sale or restructure, it may serve as a speedbump to slow down the transaction while you prepare the necessary paperwork for ASIC. To avoid being unnecessarily delayed by this process, it is best to speak to a lawyer.
Your company will need to follow the whitewash process under s 260B of the Corporations Act 2001 (Cth), if it plans to provide some form of financial assistance which materially prejudices:
If you are unsure if your company may need to whitewash its shares, it is best to seek legal advice to determine whether material prejudice exists and whether the process is in fact required.
Even though a bank may require the whitewash process at first glance, it may not be necessary in every situation. This is especially true for small family companies with lots of capital, where the existing shareholders and the purchasers are the same people. In those situations, a resolution declaring there is no material prejudice may satisfy the bank instead of the whitewash process.
There has been pushback in the legal sector on the general necessity of the whitewash process in situations where it does not add value to the company or its shareholders but rather creates delay via a cumbersome process of ticking boxes. However, while it remains law, those boxes will need to be ticked.
If whitewashing is required in your situation, the company will need to prepare the necessary notices, resolutions and forms to lodge with ASIC. However, if the whitewash process is not required, your company can save the time and cost involved and move forward with its transaction.
The whitewash process involves notifying ASIC of two steps:
The first step requires preparation of the relevant ASIC form, a notice of general meeting, and an explanatory statement about the nature, reason and effect of the financial assistance.
Once lodged with ASIC, the shareholders are notified of the meeting and attend. If approval is provided, then ASIC is notified as the second step.
There are time constraints around this process, as well as a wait period after this process, which will determine when the company can proceed with providing the financial assistance. To speed up the transaction, some of these time periods can be shortened by agreement.
Without whitewashing the shares, the transaction will still be valid, and the company will not be guilty of an offence.
However, this is a contravention of the Corporations Act, and any person involved in the transaction, including directors, may be subject to significant civil penalties.
We have assisted numerous clients to navigate the tricky whitewash requirements. If in doubt about whether your company’s proposed sale of shares requires a whitewash, or if you require assistance with the process, please reach out to our commercial law team.