4d • General discussion
Why You Cannot Take Target Security on Day One in Australia and the Step Most Buyers Miss Post Completion
Financial assistance in Australia and its impact on leveraged buyouts
In Australia financial assistance is governed by section 260A of the Corporations Act 2001. The rules are highly relevant to leveraged buyouts because acquisition debt is usually secured or guaranteed by the target group after completion. Without compliance this support can be unlawful.
Financial assistance occurs where a company helps a person acquire shares in itself or its holding company. In an LBO this commonly includes guarantees for acquisition debt granting security over assets or upstream loans or distributions used to repay the acquisition facility. The concept is interpreted broadly and does not require the company to pay the purchase price directly.
Permitted ways to give financial assistance:
A company may give financial assistance if one of the following applies.
First the assistance does not materially prejudice the interests of the company its shareholders or its creditors. In practice this is difficult to rely on in leveraged buyouts because increased leverage and security can change the company’s risk profile.
Second the assistance is approved by shareholders under the whitewash procedure in section 260B. This is the most common and lowest risk approach in LBO transactions.
Third a limited statutory exemption applies although these are rarely relevant in buyout structures.
The whitewash process in practice
The usual LBO structure is for the acquisition to complete without the target group giving guarantees or security. The whitewash is then completed post completion allowing the target group to accede to the finance documents and grant security.
The process involves the following steps:
Directors pass resolutions approving the proposed financial assistance calling a general meeting if required and approving the explanatory statement. Directors should consider solvency and creditor impacts and ensure their duties are properly addressed and minuted.
Shareholders then approve the financial assistance by special resolution meaning seventy five percent of votes cast in favour.
ASIC lodgements drive the critical timing. A copy of the notice of meeting and explanatory statement must be lodged with ASIC before it is sent to shareholders. After the resolution is passed a further notice must be lodged with ASIC and at least fourteen days must pass before the financial assistance is actually given.
Meeting and notice periods
For an unlisted company at least twenty one days notice is required for a general meeting unless validly shortened. For listed companies at least twenty eight days notice is required.
Because of the mandatory fourteen day ASIC waiting period there is a practical minimum timetable even where shareholder approval is obtained quickly.
Typical transaction timescales
In a fast private company scenario using written resolutions the process can be completed in around three weeks. This includes board approval ASIC lodgements shareholder approval and the fourteen day waiting period.
Where a general meeting is required the timetable is usually six to eight weeks. This allows for preparation circulation of the notice of meeting the shareholder vote and the ASIC waiting period.
For listed companies eight to ten weeks or longer is common due to longer notice periods and additional disclosure requirements.
Key practical points for LBOs
Do not allow the target group to give guarantees security or upstream funding connected with the acquisition until the whitewash process is complete.
Fund completion at bidco level and downstream the security and guarantees only after compliance.
Ensure finance documents clearly condition target group guarantees and security on completion of the financial assistance process.
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Why You Cannot Take Target Security on Day One in Australia and the Step Most Buyers Miss Post Completion
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