Prohibition Against Financial Assistance: A Line Easily Crossed

The High Court’s first decision on the financial assistance prohibition in section 260A of the Corporations Act 2001 (Cth) (Corporations Act) adopts a conservative approach to the prohibition.

In a unanimous judgment, the High Court held that the taking of legal proceedings by a company, at its own expense and risk, to enforce a pre-emptive rights provision for the benefit of majority shareholders qualified as financial assistance for the acquisition of shares in the company.

(Note: The full text of the decision is available on the High Court’s website.)

Case Background

Slea Pty Ltd (Slea) held a 33.3% interest in Connective Services Pty Ltd (Connective), along with two other shareholders, Millsave Holdings Pty Ltd (Millsave) and Mr Haron. Connective conducted a mortgage aggregation business. Connective’s constitution included a pre-emption clause requiring the company’s shareholders to offer their shares to their fellow shareholders before the shares could be transferred to any other party.

Slea entered into an agreement to transfer its shares to a third party, Minerva Financial Group (Minerva), without complying with this pre-emptive rights provision in the constitution. To prevent this, Connective instituted proceedings against Slea and Minerva, also joining Millsave and Mr Haron as defendants claiming that this arrangement breached the pre-emptive rights provision.

Slea and Minerva applied to have these proceedings dismissed or stayed, and sought, among other forms of relief, an injunction under section 1324 of the Corporations Act to restrain Connective from prosecuting the proceedings on the basis that they were in contravention of the implied prohibition in section 260A(1) of the Corporations Act against financial assistance.

The High Court held that the legal proceedings brought by Connective, against Slea and Minerva to enforce a pre-emptive rights provision for the benefit of other Connective shareholders at Connective’s expense, constituted financial assistance and issued the injunction.