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22/08/18

Enforcement of pre-emptive rights – watch out for financial assistance!: Slea Pty Ltd & Ors v Connective Services Pty Ltd v Ors [2018] VSCA 180

In this case, the Supreme Court of Victoria – Court of Appeal held that the bringing of proceedings by certain companies to enforce pre-emptive rights in their constitutions amounted to the provision of financial assistance to acquire their own shares in contravention of section 260A of the Corporations Act 2001 (Cth) (Act).

Connective Services Pty Limited and Connective Services OSN Limited (the Connective Companies) brought proceedings:

  • alleging that one of its shareholders, Slea Pty Ltd (Slea), intended to transfer its shares in the Connective Companies to a third party without complying with pre-emptive rights provisions in the relevant constitutions; and
  • seeking orders compelling Slea to offer its shares to the other shareholders in accordance with those pre-emptive rights.

Slea argued that in bringing and prosecuting the proceedings, the Connective Companies had contravened and would continue to contravene the implied prohibition in section 260A on giving financial assistance to acquire their own shares

The Victorian Court of Appeal allowed the appeal against the decision of Almond J in the Trial Division of the Supreme Court of Victoria and held that the Connective Companies had breached section 260A of the Act.  In so finding, the Court found that:

  • the expression “financial assistance” has no technical meaning and the Court needed to examine the commercial realities of the relevant conduct in its entirety;
  • the fact that counsel were not able to identify any prior analogous case did not mean that the conduct of the Connective Companies did not fall within section 260A;
  • the relief sought was an order to compel Slea to offer its shares to the other shareholders and therefore “assist” those other shareholders to obtain the offer and acquire the shares (if they decided to do so);
  • the “assistance” is properly characterised as “financial assistance” because it came at a financial cost to the Connective Companies which had incurred, and would continue to incur, legal costs in instituting and pursuing the proceedings (and had also undertaken a potential cost liability);
  • there was a net transfer of value from the Connective Companies (which were bearing the costs) to the other shareholders (who would receive the benefit), which may be materially prejudicial to the Connective Companies or their shareholders or creditors; and
  • the assistance was directly related to facilitating the acquisition of shares in the Connective Companies and in that way, was financial assistance to acquire those shares
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