Financial Assistance for acquiring shares
In general law, the company is prohibited from providing
financial assistance to the relevant party to acquire its own shares, or the
shares of its holding company. Such assistance can be given directly or
indirectly, such as loan or guarantee for securities. It also may be given
before or after the acquisition and take the form of dividends. The reason
behind this is to protect the interests and rights for company creditors, since
the share capital is considered as the pool of funds for the company to repay
its debts. Consequently, the financial assistance to purchase its own shares
will be a conduct of capital reduction, therefore it will unfairly prejudice
the interest of creditors.
However, S.260A(1) has suggested several approaches to
permit the company to provide financial assistance. For instance, if the
assistance does not materially prejudice the interest of company/shareholders/creditors,
if it is approved by share holders’ special resolution or it applies to the exemptions
listed under S.260C. In the famous ASIC v Adler[2002], the improper loan issued
to the PEE substantially prejudiced the interest of the HIHC and its
shareholders. That is because the rights acquired on the investment were lower
than the 10 million loan. On the other hand, the company may pass a special
resolution on general members’ meeting, which ratifies the financial
assistance. In fact, S.260B clearly discussed this topic, and if the company
would have a holding company immediately after the acquisition, then this
assistance must be approved by a special resolution in the holding company as
well S.260B(2) (3). In addition, there are plenty of exemptions that release
the company from the restriction. To illustrate, exemption for certain payment
arrangements for partly paid shares made in the ordinary course of commercial
dealing; the exemption for financial institutions if the assistant is provided
in the ordinary course of business; or the exemption for financial assistance
given as part of an employee share scheme approved by shareholders.
The S.260A is a civil penalty provision, but breaches do not
affect the validity of financial assistance or connected contract.
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