Shareholder Directions to Obtain Financial Reports

21/04/2021 - 15:47

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The Corporations Act 2001 (Cth) (‘Act’) affords shareholders of small proprietary companies the right to direct the company to provide financial and director’s reports. A written direction of a shareholder is valid and must be complied with if:

  • the shareholder holds at least 5% of the total securities;[1]
  • the request is made within 12 months following the end of the financial year of which the reports are being requested;[2] and
  • it is signed by the shareholder giving the direction.[3]

The right to this information is limited to shareholders of small proprietary companies. Under sections 45A(1) and (2) of the Act, a small proprietary company is one that satisfies at least two of the following criteria:

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

In the event a shareholder provides a valid direction (as set out above), a financial report must be:

  • prepared in compliance with the accounting standards, if requested by the shareholder under s 293(3)(a) of the Act;
  • audited if requested by the shareholder under section 293(3)(c) of the Act, or when the company had one or more crowd-source funding shareholder (CSF) during the year and the amount raised from all the CSF offers it has ever made amounts to $3 million or more;
  • pursuant to section 315(2) of the Act, provided to the members within the later of four months following the end of the financial year, or two months after the direction was made; and
  • sufficient to give a ‘true and fair view’ of the company’s financial position and performance of the company under section 297 of the Act.

Non-compliance with a Written Direction

If a company does not comply with a valid direction within the specified time limit, a shareholder may apply to the Court for an order that it comply with the written direction under section 247A of the Act with likely adverse cost consequences. Lack of funds to complete an audit is not sufficient to escape obligations under section 293.[4]

‘Good Faith’ and ‘Proper Purpose’

A shareholder must ensure they are exercising this power in ‘good faith’ and for a ‘proper purpose’. The grounds for what constitute ‘good faith’ and ‘proper purpose’ include:

  • investigating the legitimacy of transactions entered into by the company;[5] and
  • investigating concerned alleged director breaches.[6]

If you require advice or assistance with making, or complying with, a direction under the Corporations Act 2001 (Cth), reach out to Aaron McDonald at aaron@pragma.law or direct on (08) 6188 3341.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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