The Hidden Hurdle Which Delays Settlements in Share Sales: The Whitewash Procedure
O*NO! You’ve just received finance approval for your purchase of shares in a real estate agency and your bank is saying that settlement can’t occur until the whitewash procedure is followed.
This seemingly obscure but critical aspect of Corporations Law (ie. Corporations Act 2001 (Cth)) is often forgotten by both buyers and their advisers. This article is all about the whitewash procedure and what you need to know about this crucial legal requirement, shedding light on why it's triggered, how to navigate the approval process and what you can do to ensure a smooth and timely settlement for your real estate agency.
Understanding the Trigger: Financial Assistance Provisions
Picture this scenario: you're a buyer in the process of acquiring a company through a share sale. As part of the deal, your bank insists on taking security over the company you're purchasing and its assets. It's a common arrangement, but here's the twist – this situation triggers the financial assistance provisions of the Corporations Act 2001 (Cth). But what does that mean exactly?
The financial assistance provisions essentially state that the financial assistance given by a company for the acquisition of its shares is prohibited, unless the procedure set out in the Corporations Law is followed, which includes approval by its shareholders and a statement that that the granting of the financial assistance will not be detrimental to the company or the shareholders This approval process is what we generally call the "whitewash procedure," and it's often an essential step that cannot be overlooked (or you will be in breach of the law).
The Whitewash Procedure: How It Works
Now that we know why the financial assistance provisions are triggered, let's take a closer look at how the whitewash procedure works.
Timing is Crucial: The key thing to remember is that this approval needs to occur before the share sale's completion. Shareholder approval is typically sought before the transaction reaches its final stages.
Shareholder Meeting: To get the green light, a general meeting of shareholders must be convened. Here, you'll present all the relevant details of the financial assistance agreement. This includes the terms and conditions, the necessity of the financial assistance, and any potential benefits for the company.
Majority Rules: Shareholder approval is generally based on a simple majority vote. This means that more than 50% of the shareholders present at the meeting need to vote in favour of the financial assistance.
Specific ASIC Forms and Postal Lodgement
In order to comply with the whitewash procedure under the Corporations Act 2001 (Cth), specific ASIC (Australian Securities and Investments Commission) forms must be filled out and lodged via post:
Form 2602: Notice of Meeting, Proposed Resolution, and Explanatory Statement
Purpose: This form serves as an official notice to shareholders regarding the meeting where the financial assistance resolution will be considered. It includes details of the proposed resolution and an explanatory statement outlining the reasons for the financial assistance.
When to Lodge: Form 2602 must be lodged with ASIC at least 14 days before the shareholder meeting. This allows ASIC to review and assess the proposed resolution and explanatory statement.
Form 2205: Copy of Resolution
Purpose: This form is used to provide ASIC with a copy of the resolution passed at the shareholder meeting, approving the financial assistance.
When to Lodge: Form 2205 should be lodged with ASIC within 14 days after the resolution is passed at the shareholder meeting.
Form 2601: Notification of Intention to Give Financial Assistance
Purpose: Form 2601 is used to notify ASIC of the date when the financial assistance transaction is expected to be settled.
When to Lodge: This form must be lodged with ASIC at least 14 days before the date of settlement. In practice, this Form 2601 is often lodged with the Form 2205.
The Potential Time Lag
While the whitewash procedure is an essential part of share sales, it's important to be aware that it can introduce a time lag into the transaction timeline. The shareholder meeting, gathering the necessary information, and coordinating schedules can take weeks or even months, depending on the complexity of the transaction and the number of shareholders involved. This delay can be particularly challenging when tight deadlines are a part of the deal.
Why it needs to be completed correctly – the first time!
Compliance with the whitewash procedure is not just a matter of administrative detail; it's a legal obligation with significant consequences for non-compliance. Breaching the Corporations Act by not completing the procedure correctly can lead to various consequences:
Contractual Breaches: Delaying settlement by days, weeks and potentially even months could mean that a buyer is breaching the contract. This has the potential to entitle the seller to charge interest on the purchase price, or even terminate the contract altogether.
Invalid Transaction: If the whitewash procedure is not followed, the financial assistance transaction may be deemed invalid. This means that the acquisition of shares or the provision of financial assistance could be legally challenged or reversed.
Fines and Penalties: Parties involved in the transaction, including directors and officers of the company, may face fines and penalties for failing to adhere to the Corporations Act requirements.
Key Takeaways
Given the potential legal and financial consequences of non-compliance, it's crucial for all parties in a share sale to prioritise the proper completion of the whitewash procedure.
So, what can you do to avoid these risks? Be prepared.
Before entering into the sales transaction, it's essential to anticipate whether the financial approval provisions will come into play. If they do, it becomes valuable to start preparations for all components of the whitewash procedure.
Preparations for a whitewash procedure may involve informing other shareholders about the procedure, tentatively scheduling the shareholder meeting, ensuring the process concludes before the sale is completed, and timely submission of the necessary ASIC forms.
Proactive planning prevents last-minute scrambling, especially considering the potentially lengthy timeline for these tasks.
Your Next Steps
If you’re looking to purchase shares in a real estate agency in the next 12 months and want to do it without the legal hurdles book a FREE 10 minute chat with our real estate agency lawyers to find out how we can help.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.