We’ve written before about when Chapter 2E of the Corporations Act 2001 (Cth) applies to a startup and the exceptions that keep most related party deals out of general meetings. This post covers the harder scenario: no exception fits, and the company actually has to run the member approval process in sections 217 to 227. That’s a live issue for more startups than you’d think — public companies (including the pre-IPO holdco you just inserted above your operating entity), proprietary companies they control, and proprietary companies with crowd-sourced funding shareholders, which section 738ZK subjects to Chapter 2E as if they were public.
The process is prescriptive, slower than founders expect, and unforgiving of shortcuts. Here is how it actually runs.
Step 1: The Board Settles the Deal — and the Disclosure
Member approval under Chapter 2E isn’t a rubber stamp on a term sheet; it’s approval of a specific resolution to give a specific financial benefit. So the deal terms need to be final before the process starts, because section 223 says the resolution put to the meeting must be the same as the one lodged with ASIC. Renegotiate the price mid-process and you’re starting again.
The heavy lifting is the explanatory statement required by section 219. It must identify the related party, describe the nature of the financial benefit, set out each director’s recommendation on the resolution and their reasons (or why they aren’t making one), state each director’s interest in the outcome, and include everything else members would reasonably require to decide whether the deal is in the company’s interests. ASIC Regulatory Guide 76 adds flesh: ASIC expects members to be able to see the value of the benefit in dollar terms, including the principal valuation assumptions, and for significant or hard-to-value transactions it may expect an independent expert’s report. “The board considers the transaction fair” doesn’t cut it — ASIC says it is not enough for a director simply to state that they approve.
Drafting this document is real legal work with real liability attached: the care-and-diligence and good-faith duties in sections 180 and 181 extend to preparing it, and section 1309 makes giving members false or misleading material an offence.
Step 2: Lodge With ASIC and Wait Out the Review
Under section 218, the proposed notice of meeting, resolution, explanatory statement and any other material that could reasonably be expected to matter to voters must be lodged with ASIC at least 14 days before the notice is given to members — in practice, through the ASIC Regulatory Portal. You can apply in writing (with a fee) to shorten the period under section 218(3), but approval is discretionary.
ASIC reviews the materials and can issue comments under section 220 — on anything except whether the deal is a good idea — and any comments it gives must be sent to members along with the notice of meeting (section 221(d)). A comment letter saying your disclosure is inadequate, distributed with your own meeting materials, is about as helpful to the resolution as it sounds. The documents sent to members may differ from the lodged versions only in ways that aren’t material (section 221); a material change means re-lodging and restarting the review clock.
Step 3: Hold the Meeting — With the Voting Exclusion Enforced
The resolution is passed at a general meeting, on the usual notice rules — a minimum of 21 days for most companies (section 249H). The distinctive feature is section 224: the related party receiving the benefit, and their associates, must not cast a vote on the resolution in any capacity. The main carve-out is a proxy vote cast exactly as directed by a member who isn’t a related party or associate; ASIC can also grant a rarely-given declaration permitting a vote where there’s no unfair prejudice to members.
This exclusion has teeth. Under section 225, the approval is ineffective if the resolution would not have been passed but for votes cast in contravention — so in a founder-heavy register, you need to check before convening the meeting whether the unconflicted shareholders can actually carry the resolution. If the conflicted founder holds 60% and the deal needs their vote to pass, the process is pointless and the deal needs restructuring instead. Run the poll properly, apply the exclusion visibly, and minute how it was implemented.
Step 4: After the Vote
Two deadlines follow the meeting. A notice setting out the resolution must be lodged with ASIC within 14 days after it is passed (section 226). And the benefit must actually be given within 15 months of the approval (section 208(1)) — miss that window and the approval lapses. One useful carve-out: where members approved the company entering a contract and the contract is made within the 15 months, the benefits under it can flow later (section 208(2)) — which is why resolutions are usually framed as approving entry into the agreement.
If something went procedurally wrong, section 227 lets a court declare that the company has substantially complied with the member approval provisions despite the defect — a safety net for paperwork slips, not a cure for skipped steps. And if the process is skipped entirely, section 209 applies: the transaction stays valid and the company commits no offence, but everyone involved in the contravention — approving directors, the benefiting related party — faces civil penalties, with criminal liability for dishonesty.
The Real-World Timeline
Add it up: two to three weeks drafting and valuation work, 14 days of ASIC review, 21 days’ notice, then the meeting and lodgments. A clean Chapter 2E approval is a six-to-eight-week project, longer if ASIC comments or an expert report is needed. That’s why boards structure around the exceptions — arm’s length terms, reasonable remuneration, small amounts — where they genuinely apply, and why the board-level conflict mechanics in section 195 still have to be handled in parallel: member approval doesn’t excuse sloppy boardroom process.
If your startup has a CSF register, a public holdco or an IPO on the horizon, build related party discipline into your governance documents before a deal forces the issue. Our business setup and structuring practice designs approval frameworks that survive this regime, and as startup lawyers in Sydney we’ve run these processes enough times to know where they stall.
This article is general information only, not legal advice — whether Chapter 2E approval is required, and how the process applies, depends on your company’s structure and the transaction’s terms. Viridian Lawyers advises Australian startups on corporate governance and capital raising. If a related party deal needs shareholder sign-off, get in touch.
