A pattern we see at CXT Legal often enough to write about. The Share Sale Agreement is agreed, the conditions are all but satisfied, and completion is booked for a fortnight away. Then the financier’s security schedule lands. The target company is to give a guarantee, and security over its own assets, to support the debt the buyer is using to pay for the shares in that same company. Someone asks whether a financial assistance whitewash has been done. Nobody has done one, and completion moves.

Section 260A of the Corporations Act is the reason. A company can only financially assist a person to acquire shares in it, or in its holding company, if the assistance does not materially prejudice the company, its shareholders or its ability to pay its creditors; or the assistance is approved by shareholders under section 260B; or it falls inside one of the narrow exemptions in section 260C.

The breadth of the section is what catches people. It is not confined to lending money. A guarantee, a security interest, an indemnity, a pre-completion dividend or loan used to fund the price, the target paying the buyer’s transaction costs, a debt push-down — each of these can be financial assistance, and it makes no difference whether it is given before, at, or after the shares change hands.

Why it arrives late

The funding structure is almost always the last piece to settle. Heads of agreement get signed on price and a finance condition. The security package is not drafted until credit approval comes through, which is frequently after the sale agreement is signed. Late tax restructuring does the same thing: a pre-completion dividend or a push-down that started life as an accounting question turns out to be a section 260A question, and by then the timetable has no give in it.

What it costs in time

Approval is not a board minute. It takes a special resolution of the target’s shareholders, or a resolution agreed to by every ordinary shareholder, with the acquirer and its associates not voting. The notice of meeting and the explanatory statement must be lodged with ASIC before they go out to members, and the assistance cannot be given until 14 days after notice of the resolution is lodged. With a co-operative vendor and a patient financier, three weeks is a fair run. With minority shareholders, an offshore holding company or a listed parent in the chain, longer.

People reach for the ‘no material prejudice’ limb to avoid the process. Occasionally that is the right call. More often it is a judgement the financier’s lawyers will not wear, and forming it properly takes nearly as long as whitewashing would have. Contravention does not invalidate the transaction, but any person knowingly involved, directors, the buyer, on occasion the lender, is exposed to a civil penalty, and to criminal liability where there has been dishonesty.

Three questions, asked early

If you are advising a buyer or seller, ask these at term sheet stage rather than at settlement:

If the answer to the second is yes, or even maybe, the whitewash belongs in the timetable from the outset. Run in parallel with due diligence it costs almost nothing. Run from a standing start two weeks out from completion, it costs the completion date, and sometimes the deal terms that went with it.

How we handle it

At CXT Legal we raise financial assistance right at the start, because we would rather find it in week one than explain it in week seven. If you are working on a transaction where the target’s balance sheet is doing any of the lifting, we are happy to take the call early and tell you whether it is an issue. That conversation is usually short, and avoids a lot of pain on the back end.