Share Sale Agreements and the Requirements for the Whitewash Procedure

Written by Sarah Olley

A Share Sale Agreement (SSA) is a legally binding contract that governs the sale of shares in a company between a buyer and a seller. These agreements are fundamental in mergers and acquisitions, joint ventures, and other corporate restructuring activities.

When the party acquiring the shares, or its holding company, looks to obtain financial assistance, undertaking the whitewash process may be required to ensure that the transaction is legally compliant and ensures the shareholders of the company approve the financial assistance.

This article delves into what an SSA entails, some circumstances under which the whitewash process is required, and the steps to take for compliance under Australian law.

1. What is an SSA?

An SSA is an agreement between a seller and a buyer in which the seller agrees to transfer ownership of shares in a company to the buyer in exchange for an agreed consideration. This agreement governs various aspects of the sale, including the number and type of shares being transferred, payment terms, warranties, representations, and conditions that must be fulfilled for the sale to proceed.

Key Elements of an SSA:

• Parties Involved: The SSA identifies the buyer(s) and seller(s), along with their respective rights and obligations.
• Sale Price and Payment Terms: It specifies the purchase price for the shares and the manner in which the payment will be made (e.g., lump sum, instalments, etc.).
• Warranties and Representations: The seller typically provides assurances regarding the financial status of the company, ownership of shares, and confirms there are no undisclosed liabilities. These warranties protect the buyer from any potential legal or financial surprises post completion.
• Conditions Precedent: These are conditions that must be met before completion can be effected, such as regulatory approvals, third-party consents, or shareholder approvals.
• Post-Completion Obligations: After the transaction is completed, there may be obligations related to the transition, such as non-compete clauses, employee retention, or the management of intellectual property.

2. What is the Whitewash Process?

The whitewash process refers to a legal procedure that allows a company to provide financial assistance without violating certain provisions under Australian law, specifically the Corporations Act 2001 (Cth) (“the Act”). Under Section 260A of the Act, a company is generally prohibited from providing financial assistance in connection with the acquisition of its own shares where assistance could potentially harm the company’s financial position or mislead its shareholders.

The whitewash process, set out at section 260B of the Act, allows companies to bypass this restriction by following a legal procedure to ensure the transaction is conducted in a transparent and compliant manner. It is most often associated with situations where a company provides financial assistance (such as loans or guarantees) for the acquisition of its own shares.

3. When is the Whitewash Process Required for an SSA?

While the whitewash process is not required in every SSA, there are specific circumstances where it becomes necessary. The whitewash process is primarily needed in cases where the sale involves financial assistance. Below is a common scenario that may require a whitewash:

a) Financial Assistance for the Acquisition of Shares

Under Section 260A of the Act, a company is prohibited from providing financial assistance to a person to acquire its own shares, unless the transaction is approved through the whitewash procedure.

This provision ensures that companies do not put themselves at financial risk by providing loans, guarantees, or other forms of financial assistance to help a shareholder purchase additional shares in the company.

For example, if a company agrees to lend money or offer a guarantee to a buyer to enable them to purchase shares in the company, this constitutes financial assistance. To proceed with such a transaction legally, the company must follow the whitewash process to obtain shareholder approval and meet other requirements set forth under the Act.

4. The Whitewash Process: Key Steps and Requirements

Below are the key steps involved in the whitewash process:

a) Prepare a Draft Notice of the General Meeting:

The notice must include the resolutions to be considered, along with the general information of the meeting such as the date, time, and place of the meeting. There should also be an adequate explanatory memorandum attached that details what the transaction is, why it would be considered financial assistance, the benefits/negatives of the shareholders agreeing to the financial assistance and other relevant information regarding the financial assistance.

b) The Directors Approve the Draft Notice and Lodge Forms 2602 with ASIC:

The company’s directors must then hold a board meeting or sign a circular resolution to approve the draft notice and explanatory memorandum noted above. They must also agree to convene a general meeting of shareholders, which can be called on short notice if members agree or with a 21-day notice.

Once approved by the directors, the Form 2602 attaching the notice of general meeting and explanatory memorandum is required to be lodged with ASIC. This form must be lodged at least 22 days before any financial assistance is granted.

c) Notice of the Meeting is sent to Shareholders:

The notice of general meeting and explanatory memorandum is then required to be sent to all shareholders after lodgement of the Form 2602. This notice must be sent at least 21 days before the meeting itself (or otherwise provided for under the company’s constitution), or otherwise can be issued on shorter notice if agreed by the shareholders.

d) Hold a General Meeting of Shareholders and Lodge Forms 2205 and 2601 with ASIC:

The company is then required to hold the general meeting where shareholders vote on the items in the notice and explanatory memorandum and if they do or do not approve the financial assistance the company proposes to receive/provide to the proposed new shareholder under the SSA.

e) Lodge a Second and Third Form with ASIC:

If the shareholders agree to the financial assistance being provided, the company then needs to lodge with ASIC a Form 2205 with a copy of the signed resolution authorising same (this must be lodged within 14 days of the passing of the resolution), and a Form 2601. These forms must be lodged at least 14 days before the financial assistance is provided.

f) Proceed with Providing Financial Assistance:

Once all of the above has been completed and the 14 day period has passed, the company can proceed with providing the financial assistance under the SSA.

5. Risks of Non-Compliance

Failure to properly follow the whitewash process can result in significant legal and financial risks for the company. If the required approvals by company members and shareholders and the relevant processes under the Act are not followed, the transaction could be declared void, which may lead to the reversal of the sale or financial assistance. Further, non-compliance with the Act may lead to penalties imposed by regulatory authorities such as ASIC.

It is important to note that ASIC however will only confirm receipt of the forms and documents, and it does not approve or consider the validity of the financial assistance. Shareholders are reminded it is solely their decision and responsibility to consider whether or not the company should give the financial assistance and vote accordingly.

Importance of Legal Guidance in an SSA

An SSA is a crucial tool in transacting in the corporate world, and where financial assistance becomes an item that could be considered for a company to fund SSAs, following the whitewash process becomes essential. The whitewash procedure ensures that transactions are compliant with the law and transparent to the shareholders in the company itself.

Businesses engaging in SSAs involving any form of financial assistance should seek legal advice to navigate the whitewash process effectively. Please contact the team at JHK Legal if you have any questions in relation to this process and we would be happy to assist.