Connective Services Pty Ltd v Slea Pty Ltd (Case), handed down by the High Court on 9 October 2019, concerns the scope of section 260A(1) of the Corporations Act 2001 (Cth) (Act). It is the first time the High Court has considered the provision, which provides guidance on the limits of companies providing financial assistance to its shareholders.
Section 260A(1) of the Act provides that a company may financially assist a person to acquire shares in the company, only if giving the assistance:
- does not prejudice:
- the interests of the company or its shareholders;
- the company’s ability to pay creditors;
- does not prejudice:
- is approved by shareholders under section 260B of the Act; or
- the assistance is exempted under section 260C of the Act.
Slea Pty Ltd (Slea) held a one-third stake in Connective Services Pty Ltd (Connective or the Company), a mortgage aggregation business.
Connective’s constitution contained a pre-emption clause. The pre-emption clause required that before shareholders could transfer shares of a particular class, those shares must first be offered to existing shareholders in proportion to the shares currently held by the other shareholders (Pre-emption Clause).
In May 2009, Slea entered into an agreement to transfer its shares to a third party, Minerva Financial Group, in contravention of the Pre-emption Clause. In response, Connective issued proceedings in an attempt to compel Slea to offer its shares to the Connective shareholders in accordance with the Pre-emption Clause.
Slea then sought an injunction to restrain Connective from pursuing the proceedings. In doing so, Slea argued that Connective had breached section 260A of the Act as the proceedings were being brought for the benefit of Connective’s shareholders, at Connective’s expense.
The High Court unanimously found in favour of Slea in granting the injunction. In doing so, the Court examined three elements that were considered necessary to establish breach of section 260A of the Act:
- financial assistance given by Connective;
- to acquire shares or units of shares in the Company;
- which materially prejudices the interests of the Company or its shareholders or its ability to pay creditors.
Element 1: Financial Assistance provided by Connective
The term ‘financial assistance’ has a broad legal meaning. In the Case, the term was construed as broad enough to encompass the funding of legal proceedings in order to enforce a constitutional clause that benefited shareholders.
The High Court held that financial assistance need not involve a money payment by the company to the person acquiring shares. Any action by a company could be deemed financial assistance.
Element 2: To Acquire Shares or Units of Shares in the Company
‘Acquire’ in this context refers to all conduct, which includes transfers and share issues, in connection with the process of acquiring shares or units of shares. “To acquire” in this sense, includes conduct that is ‘in connection with the process of an acquisition’ and not ‘limited to conduct for the purpose of the acquisition’.
The Court held that acquisition requires a ‘sufficient link between the financial assistance and the acquisition of the shares or units of shares.’
Element 3: Which Materially Prejudices the Interests of the Company or its Shareholders or its Ability to Pay Creditors
The breadth of section 260A is constrained by the implied prohibition that financial assistance may not be materially prejudicial to the interest of the company or its shareholders or its ability to pay its creditors.
The High Court noted that material prejudice to shareholders should be taken to mean shareholders both collectively and individually. The examination of material prejudice was found as requiring an assessment between the position of the company prior to and after the company purportedly provided the financial assistance.
Section 1324(1B)(a) of the Act provides that where the ground relied on in an injunction application is an alleged contravention of section 260A(1)(a), the Court will assume that the conduct constitutes a contravention. As such, the High Court held that the onus of proof is on companies to satisfy to the court that material prejudice will not occur in the circumstances. Connective could not discharge the burden in the circumstances.
The Case indicates that the concept of financial assistance will be construed broadly by the Court. Given this broad interpretation, it would be generally appropriate for companies to seek shareholder approval pursuant to section 260B of the Act in order to avoid breaching section 260A.