What is a section 293 direction?

There are several reasons why a shareholder may require financial information, primarily they are denied access to the ‘accounts’ so as to make informed decision about the company. The Corporations Act 2001 (Cth) (Act) provides various mechanisms for shareholders to obtain financial and accounting information about a company, to allow them to access full and complete information about the financial circumstances of the company that they hold shares in. One such mechanism is referred to as a section 293 shareholder direction, which compels companies to provide requested financial reports as defined by section 293.

What is a section 293 shareholder direction?

A small proprietary company may be excluded from accounting or financial reporting obligations in section 292(2). Notwithstanding this, all companies, including a small proprietary company, must keep adequate records of all accounting or financial transactions to allow it to compile financial statements if requested.[1] Section 293 of the Act provides that shareholders controlling at least 5% of a shares in a company may direct that accounts, such as financial statements and reports, be prepared and sent to all shareholders.

What is a small proprietary company?

The right to information pursuant to section 293 is limited to small proprietary companies. According to section 45A of the Act, a small proprietary company is one that satisfies at least two (2) of the following criteria:

has less than fifty (50) employees;
has a total revenue of less than $25million; or
has total gross assets valued at less than $12.5million.

What has to be done in response to a section 293 Direction?

On receiving a written direction in accordance with section 293, the company must prepare a financial report which is:

prepared in compliance with accounting standards if requested by the shareholder under section 293(3)(a);
audited but only when requested by the shareholder under section 293(3)(c); and
sent to members within four (4) months after the end of the financial year, or within the later of four (4) months after the financial year end or two (2) months after a request by shareholders.[2]

Notably, a shareholder direction may include an obligation to audit the accounts. The report need not be lodged with the Australian Securities and Investments Commission (ASIC), unless the company had one or more crowd-sourced funding shareholders at any time during the year.

What financial information is a shareholder entitled to?

In providing a section 293 direction, a shareholder will be entitled to a financial report which includes financial statements along with disclosures and notes to the financial statements, and a directors’ declaration about the statements.[3] The financial report must be sufficient to give a ‘true and fair view’ of the financial position and performance of the company.[4] If the financial statements and notes provided would not give a true and fair view, additional information must be included in the notes.

What are the consequences of non-compliance with the section 293 direction

If a company does not comply with a direction to prepare and circulate financial reports, a shareholder may apply to the Court for an order that it comply with the written direction. The case of Trafalgar West Investments Pty Ltd v Superior Laws Australia Pty Ltd [2011] WASC 171 is an example of what the Court will consider in deciding whether to enforce a section 293 direction after the expiry of the time limit specified in section 315(2).

In that case, Trafalgar West Investments Pty Ltd ACN 008 829 972 (Trafalgar) held 30% of the shares in Superior Lawns Australia Pty Ltd ACN 008 798 007 (Superior Lawns). Trafalgar validly provided Superior Lawns with a valid written direction for a directors’ report and audited financial report, in accordance with section 293 of the Act. Superior Lawns failed to comply with the direction within the time limit in section 315(2) of the Act. Trafalgar sought orders to enforce Superior Lawns’ statutory obligations to provide the financial reports. Superior Lawns argued that they were unable to complete the audit due to lack of funds. Superior Lawns proposed to issue an additional three (3) million shares to Trafalgar for a total of $300,000, to raising capital.

With respect to the expiry of the time limit in section 315(2), the Court said it was in everyone’s interest that the audit work be completed as soon as possible. The Court took a balanced approach and weighed Superior Lawns’ inconvenience of completing the audit against the importance of protecting Trafalgar. The Court said that funding issues were not enough for Superior Lawns to escape their obligations under section 293. Therefore the Court allowed Superior Lawns’ proposed capital raising, but ordered that Superior Lawns provide an undertaking that any capital raised would be used to facilitate the completion of the audit work for Trafalgar by 30 June 2010.

Takeaways

It is important shareholders are able to access information about the company they hold shares in when requested, to avoid possible allegations of oppression and prevent a company from acting in a way that prejudices the members. Companies who do not comply with a section 293 direction may be subject to Court proceedings.

Legislation

Corporations Act 2001 (Cth)

Cases

Trafalgar West Investments Pty Ltd v Superior Laws Australia Pty Ltd [2011] WASC 171

Further information

If you need assistance with shareholder oppression or access to financial records, please telephone me for an obligation free and confidential discussion.

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au