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Recently, the High Court in Connective Services Pty Ltd & Anor v Slea Pty Ltd & Ors  HCA 33 has identified that where a company seeks to enforce a provision of its own constitution against a shareholder and that right relates to its shares, the company should be careful not to infringe against the prohibition to provide “financial assistance”.
The appellants, two companies, adopted a constitution in 2003 which provided that if a shareholder wished to sell their shares, they must sell them to the remaining shareholders in proportion to the remaining shareholders’ current shareholding (the Pre-emptive Right).
In 2009, a shareholder agreed to sell all their shares to another shareholder to the exclusion of the others, contrary to the Pre-emptive Right (Share Sale Agreement). The companies instituted proceedings in its name that the agreement was in breach of the Pre-emptive Right.
The parties to the Share Sale Agreement applied to the Court that the proceedings be dismissed or stayed as it infringed the prohibition to provide financial assistance in relation to the acquisition of its own shares.
In deciding whether the companies had breached this prohibition, the High Court identified three elements which must be established:
The Court identified that:
This case provides a timely reminder that although a constitution or shareholders agreement may include rights a company can enforce, such provisions do not automatically mean that the company can enforce those rights.