Home › Corporations Law › 10 · Share capital

Module 10 · Share capital: dividends, reductions, buy-backs and financial assistance

Reductions and buy-backs arrive as the capital device inside squeeze-out problems, stapled to Module 9's remedies. Learn the four regimes well enough to argue their architectures against each other.

Cases at a glance

Case	In a line
Gambotto	A share is transferable personal property conferring proprietary rights, so expropriating amendments face strict review (Module 9)
Colonial Bank	A share lets the investor employ its rights with the force of law
Macaura	A timber farmer insured company timber in his own name. The insurance failed. Shareholders do not own the company's assets
Salomon	A shoemaker incorporated his business, family holding shares on his terms. The company is a separate entity, members holding participatory rights only
Trevor v Whitworth	Paid up capital cannot return to shareholders unless statute allows, protecting would-be creditors relying on the capital
Marra Developments	Interim dividends rest on anticipated profit
KGD Investments	Borrowing to pay a dividend merely swaps liabilities and is not itself material prejudice
Re CSR	Prejudice must be material not theoretical. Is it now more likely creditors go unpaid
BTR Nylex	The constitution may limit the nature and process of dividends
QBE	There is no general right to a dividend
Moxham	A shareholder who knew or ought to know a dividend unlawful must return it
Re Allas Energy	An informed general meeting approval persuasively shows fair and reasonable
NRMA v Fraser	Meeting notices must disclose all material information known to the company
BPESAM IV M	Misleading buy-back disclosure grounds an urgent injunction against the resolution
Connective Services	Financial assistance is judged by commercial reality. Did the company make buying its shares easier
Adler	HIH's investment arm paid $10 million to a trustee company Adler alone directed, part buying HIH shares to support their price. Indirect interlocking assistance is captured, with the material prejudice factors
Re VGM	A gift can be financial assistance
Firmin	A security over company assets can be financial assistance
E H Dey	Releasing a debt can be financial assistance

Attack plan. Characterise the transaction first. Money or value is leaving the company toward shareholders, or toward someone buying shares. 1. Which regime? A dividend is regular, to all shareholders, out of profit. A capital reduction is ad hoc, out of capital, often selective, and a cancellation of shares is never a dividend. A buy-back is voluntary, a mere offer shareholders can refuse, so find an offer on the facts. Financial assistance is helping someone buy shares in the company or its holding company, by money or otherwise. 2. Run the regime. Apply that regime's gateway test, approval requirement and creditor protection. 3. Consequences. In every statutory regime the transaction stays valid and the company commits no offence. Liability lands on the people involved. 4. The overlay. Directors' duties still apply in statute and at general law (s 260E), s 1324 injunctions can stop a transaction in advance, and where a director benefits in a public company check Ch 2E related party approval (Module 8).

Shares and classes

Share. Transferable personal property conferring proprietary rights on the investor (s 1070A; Gambotto; Colonial Bank). The rights are participatory only: a shareholder does not own the company's assets (Macaura; Salomon). The constitution can limit how shares are transferred or how capital is dealt with, including by dividend, reduction or buy-back (s 1070A).

RULE. A company has power to issue and cancel shares (s 124(1)(a)), including bonus shares, preference shares and partly paid shares (s 254A(1)), and may determine the terms, rights and restrictions of issue (s 254B(1)). The holder of a partly paid share is liable accordingly to pay calls, meaning demands for the unpaid balance (s 254M(1)).

RULE. twistUnder a replaceable rule for proprietary companies, before issuing shares generally the company must offer them to existing holders of the same class in proportion to their holdings (s 254D(1)), stating the number and offer period (s 254D(2)). Leftovers may be issued as seen fit (s 254D(3)) and a general meeting resolution can displace the rule (s 254D(4)).

Capital maintenance and its statutory descendants

RULE. arrowtwistThe capital maintenance rule prohibits transactions returning capital already paid up to shareholders unless statute allows it, protecting the outside public who may become creditors on the strength of the company's capital (Trevor v Whitworth). Distinguish losing capital in the ordinary course of business, which the rule never touched.

The doctrine survives in translated form. Each regime below replicates it through a no-material-prejudice-to-creditors test, and the stated purposes of the rules are insolvency risk, fairness between shareholders and disclosure of material information (s 256A).

Dividends: ss 254T and 254U

A dividend is a payment to members out of profit rather than capital. Distinguish interim dividends, based on anticipated profit (Marra Developments), from final dividends on cycle.

RULE. checklistA company must not pay a dividend unless three conditions hold. Its assets must exceed its liabilities immediately before declaration and the excess must be sufficient for the payment (s 254T(1)(a)), judged by the accounting standards at the time (s 254T(2)). The payment must be fair and reasonable to the shareholders as a whole (s 254T(1)(b)). And it must not materially prejudice the company's ability to pay its creditors (s 254T(1)(c)).

Fair and reasonable: a single class with equal rights treated in equal proportion passes easily, while different classes receiving different dividends need the fuller fairness analysis used for reductions.
Material prejudice: borrowing to pay the dividend is not by itself enough (KGD Investments). The prejudice must be material, not theoretical. Is it now more likely creditors will not be paid (Re CSR)?
No shareholder approval is required (s 254U). The replaceable rule lets directors set the amount, time and method of payment (cash, share issue, option grant, asset transfer), with no interest (s 254U), and since it does not speak to declaration, the company may simply pay. The constitution may limit the nature and process of dividends (BTR Nylex).
There is no general right to a dividend (QBE Insurance Group), though persistent starvation can feed oppression (s 232, Module 9).

Consequences of an improper dividend. Likely a duty-of-care breach. Where capital rather than profit was used, an impermissible capital reduction against the s 256A scheme. Injunctions are available (s 1324), and Sch 3 carries imprisonment exposure. The insolvent-trading debt is incurred at declaration or, absent constitutional provision for declaration, when the time fixed for payment arises (s 588G(1A) item 1; s 254V). A shareholder who knew or ought to have known the dividend was unlawful must return it (Moxham).

Reductions of capital: ss 256A to 256E

RULE. checklistA company may reduce its share capital where the reduction is fair and reasonable to the shareholders as a whole (s 256B(1)(a)), does not materially prejudice its ability to pay creditors (s 256B(1)(b)), and is approved under s 256C (s 256B(1)(c)). All three are required.

Equal vs selective: an equal reduction relates only to ordinary shares, applies in proportion to each holding, on the same terms for all (s 256B(2)). Anything else is selective. Contrast a buy-back: an offer can be refused, but an approved reduction cannot.
Fair and reasonable asks how much is paid, whether control has changed (not merely a smaller majority), and whether classes are treated fairly. It is a collective inquiry, so one unhappy shareholder does not make it unfair. Informed general meeting approval is persuasive (Re Allas Energy), and an equal reduction is very likely fair.
Creditor prejudice must be material, not theoretical (Re CSR). The requirement does not apply to cancelling fully-paid shares for no consideration (s 256B(1A)).

RULE. gateApproval turns on the type of reduction. An equal reduction needs an ordinary resolution by simple majority at a general meeting (s 256C(1)). A selective reduction needs a special resolution of 75 per cent with no votes in favour by those receiving consideration or their associates, or else a resolution of all ordinary shareholders (s 256C(2)), and one absent holder defeats the unanimous route. Where the selective reduction cancels shares it also needs a special resolution of the holders whose shares go (s 256C(2)), which may need a second meeting.

Lodge with ASIC within 14 days of passage, and no reduction until 14 days after lodgment (s 256C(3)). Meeting notices must disclose all information known to the company material to the vote, unless already disclosed and unreasonable to repeat (s 256C(4); see NRMA v Fraser), and be lodged before sending (s 256C(5)).

RULE. arrowA failure to comply with s 256B(1) does not affect the validity of the reduction or any related contract, and the company is not guilty of an offence (s 256D(2)). Persons involved contravene civilly (s 256D(3); ss 1317E, 79) and dishonest involvement is criminal (s 256D(4)).

A reduction is a debt when it takes effect (s 588G(1A) item 2), injunctions are available (s 1324), and a compliant reduction benefiting a public company director may still need Ch 2E approval (Module 8).

Scope note. Buy-backs sit on the course outline: check your reading guide for whether they are examinable in your year. They are taught in this course, so treat them as live and drill them with the rest of the cluster.

A buy-back is the company's offer to purchase its own shares: a voluntary form of capital reduction with its own division displacing s 256B. Because shareholders can refuse the offer, the scheme protects creditors and disclosure rather than imposing a fairness test.

RULE. checklistA company may buy back its own shares where doing so does not materially prejudice its ability to pay creditors (s 257A(a), prejudice material not theoretical, Re CSR) and the procedures in Pt 2J.1 Div 2 are followed (s 257A(b)).

Types. Equal access is a same-percentage, same-terms offer to every ordinary shareholder with a reasonable opportunity to accept, and no agreement until acceptance closes (s 257B(2)). On-market means offers in ordinary trading (s 257B(6)). Minimum holding and employee share scheme buy-backs are defined in s 9, and anything else is selective (s 9). The 10/12 limit is 10 per cent of the lowest number of votes in the last 12 months (ss 257B(4), (5)).
Procedures (s 257B(1)). Over the 10/12 limit, an ordinary resolution (s 257C). For a selective buy-back, a special resolution with no votes by sellers or associates, or a unanimous resolution (s 257D). For equal access or selective buy-backs, lodge the offer documents with ASIC beforehand (s 257E) and disclose all known material information with the offer itself (s 257G). For all but minimum holding buy-backs, 14 days' notice by lodgment (s 257F). Always, cancel the shares and notify ASIC (ss 257H, 254Y).
Once the agreement is made the shares' rights are suspended, the company cannot dispose of them, and they are cancelled on transfer (s 257H). Misleading disclosure can ground an urgent injunction against the resolution (BPESAM IV M; cf NRMA v Fraser). Consequences mirror the reduction scheme (s 259F), and the debt arises at the buy-back agreement (s 588G(1A) item 3).

Financial assistance for acquiring shares: ss 260A to 260E

Financial assistance, giving a financial advantage or easing a financial burden so someone can acquire shares in the company or its holding company, can come before or after the acquisition and can be a dividend (s 260A(2)). Acquisition covers issue, transfer or any other means (s 260A(3)).

RULE. compassFinancial assistance is read through commercial reality. Ask whether the company gave a financial advantage or eased a burden, whether its assets were impoverished as a result, and whether it is now easier for someone to buy the shares (Connective Services; ASIC v Adler). The assistance can be indirect, through a third party, and the interlocking elements of the transaction are viewed together (Adler, where HIH's investment arm paid $10 million to a trustee company Adler alone directed, which used part of the money to buy HIH shares to support their price).

Recognised forms: a loan to fund the purchase (Adler), taking back less valuable benefits such as worthless or rapidly depreciating shares (Adler), a dividend (s 260A(2)(b)), a gift (Re VGM Holdings), a security over the company's assets (Firmin), releasing a debt (E H Dey), and issuing only partly-paid shares. The breadth matches "financial benefit" in Ch 2E.

RULE. keyringA company may financially assist a person to acquire shares in itself or its holding company only where one of three routes is open. The first requires that the assistance not materially prejudice the interests of the company or its shareholders (s 260A(1)(a)(i)) and not materially prejudice the ability to pay creditors (s 260A(1)(a)(ii)), and both limbs must be checked because both are required. The second is shareholder approval under s 260B with advance notice to ASIC. The third is an exemption under s 260C.

The material prejudice factors from Adler are the impact on cashflow, profitability and assets, any non-financial effects (reputation, share-price risk, false pretences), a return considerably less than what was given, missing protections, duty breaches or conflicts, and default risk on any loan or obligation.
Approval (s 260B). A special resolution with no votes in favour by the acquirer or associates, or a resolution of all ordinary shareholders (s 260B(1)). A subsidiary of a listed, or unlisted top, domestic corporation also needs that corporation's special resolution (ss 260B(2), (3)). Material information must be disclosed with the notice (s 260B(4)), and the lodgment requirements include lodging the approval at least 14 days before the assistance (ss 260B(5) to (7)).
Exemptions (s 260C). Ordinary-course liens on partly-paid shares and instalment agreements (s 260C(1)). Financial businesses lending on ordinary commercial terms in the ordinary course (s 260C(2)). A subsidiary's ordinary-course guarantee of a debenture borrower's repayment (s 260C(3)). Approved employee share schemes (s 260C(4)). A valid reduction, buy-back or ordinary-terms discharge of a liability (s 260C(5)).

RULE. arrowContravention does not affect the validity of the assistance or any related contract and the company is not guilty of an offence (s 260D(1)). The persons involved contravene civilly (s 260D(2)) and criminally if dishonest (s 260D(3)). Directors' duties continue to apply in statute and at general law (s 260E), with the duty of care especially exposed (Adler) and good faith also live. The debt arises when the agreement to assist is entered or the assistance given (s 588G(1A) item 6).

The four regimes compared

	Dividend	Reduction	Buy-back	Financial assistance
Gateway test	net assets sufficient + fair and reasonable (s 254T(1))	fair and reasonable to shareholders as a whole (s 256B(1)(a))	an offer + Div 2 procedures (s 257A(b)); no fairness test: refusal protects the shareholder	no material prejudice to company or shareholders (s 260A(1)(a)(i)), OR approval, OR exemption
Approval required	none (s 254U)	equal: ordinary; selective: special (no interested votes) or unanimous (s 256C)	none within the 10/12 limit; ordinary above it (s 257C); selective: special or unanimous (s 257D)	only on the approval route: special (no interested votes) or unanimous, plus any holding company approval (s 260B)
Creditor protection	no material prejudice (s 254T(1)(c))	no material prejudice (s 256B(1)(b))	no material prejudice (s 257A(a))	no material prejudice to ability to pay creditors (s 260A(1)(a)(ii))
Consequence of breach	duty breaches; Sch 3; recipient repays (Moxham); debt at declaration (item 1)	valid; involved persons liable (s 256D); debt when effective (item 2)	valid; involved persons liable (s 259F); debt at agreement (item 3)	valid; involved persons liable (s 260D); debt at agreement or assistance (item 6)

Critical pitfalls and counter-arguments

Trap. Assistance by a subsidiary for shares in its holding company is captured, and chronically missed. The remaining 70% of the shares are owned by PocoChoc Pty Ltd", then "Felicity therefore approaches WestComm Bank for a personal loan secured by a guarantee provided by Deluxice", the loan buying shares in PocoChoc. The report: "many students did not mention the holding company aspect." Reassemble the group structure before applying s 260A: a guarantee is indirect assistance on commercial reality (Connective Services; cf security, Firmin).

Trap. A directors' meeting is not shareholder approval. In 2023 the guarantee was authorised "at a directors' meeting of Deluxice", and the report insisted: "Note that there was no general meeting held: it was a directors' meeting." Section 260B requires a shareholder resolution: a formally documented approval at the wrong organ leaves the approval route closed, and saying so is marked content.

Trap. The Ch 2E red herring in proprietary companies. The 2023 transaction benefited a director, classic related party bait, but "Chapter 2E of the Corporations Act was not relevant because Deluxice was a proprietary company." Ch 2E's member-approval machinery (Module 8) attaches to public companies, a proprietary company switches it off, and 2024 ran the trap in reverse with a public company. Derive applicability from company type every time.

Exam calibration. The money always leaves indirectly: trace where it went and who ended up holding shares. Reductions and buy-backs arrive as the capital device inside squeeze-out problems (2019, 2021, 2022), stapled to Module 9's remedies. Know both architectures well enough to argue them against each other.

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take the 2023 guarantee facts, reassemble the group structure first, then write the paragraph applying s 260A to the subsidiary's guarantee for shares in its holding company.
Take any payment leaving a company and write the characterisation sentence that sorts it into dividend, reduction, buy-back or financial assistance, naming the fact that decides it.
Run the three s 254T conditions on a dividend funded by borrowing, and argue material prejudice both ways with KGD Investments and Re CSR.
Draft the approval analysis for a selective reduction that cancels shares, naming each resolution required under s 256C and the lodgment timetable.
Be ready to argue it both ways: the case for stripping shareholder approval from s 256B using s 260A as the model, and the case for keeping it.

Check your understanding

Auto-marked drills. Answer, then see the authority in the feedback.