Startups transact with their own directors constantly. A founder lends the company money to cover payroll. The company licenses software from a founder’s previous venture. A director’s consultancy invoices for growth work. An investor director’s fund sublets the company its office. Each of these is a related party transaction, and each sits in the shadow of Chapter 2E of the Corporations Act 2001 (Cth) — a regime most founders have heard of but few can say exactly when it applies. The answer matters, because the companies it covers face a shareholder vote before the deal, and the companies it doesn’t cover still face investors, directors’ duties and liquidators who behave as if it did.
What Chapter 2E Actually Requires
The core rule is section 208: a public company, or an entity it controls, must obtain the approval of its members before giving a financial benefit to a related party, unless an exception applies — and must give the benefit within 15 months of the approval. The stated purpose (section 207) is to protect members where their interests could be endangered by insiders dealing with the company.
Both operative concepts are deliberately broad. A financial benefit (section 229) is assessed on economic substance rather than form: it captures indirect benefits, benefits given through interposed entities, informal and unenforceable arrangements, and transactions at an undervalue — not just cash payments. Buying an asset from a director, forgiving their loan, issuing them shares cheaply and taking over their liabilities are all on the statutory list of examples.
A related party (section 228) includes the directors of the company, the directors of any entity that controls it, the spouses of those directors, the parents and children of the directors and of their spouses, any entity controlled by any of them, and the controlling entity itself. It also reaches entities that were related parties in the previous six months, entities with reasonable grounds to believe they’ll become one, and entities that act in concert with a related party — so routing the deal through a director’s family trust or their mate’s shelf company doesn’t take it outside the net.
Does Chapter 2E Apply to Your Startup?
For most startups the honest answer is: not directly — yet. Chapter 2E binds public companies, and the typical venture-backed startup is a proprietary company. But there are three ways a startup finds itself inside the regime, and founders routinely miss all of them.
You’re controlled by a public company. Section 208 extends to entities controlled by a public company. If your group structure includes a public holding company — common in pre-IPO restructures — the operating Pty Ltd is caught too.
You’ve raised through equity crowdfunding. Under section 738ZK, a proprietary company with one or more CSF shareholders is subject to Chapter 2E as if it were a public company. Parliament’s logic was simple: once you take money from the crowd, the crowd gets the protections. If you’ve run a crowd-sourced funding offer, related party deals that would have been board business now need a shareholder meeting unless an exception applies.
You’re becoming public anyway. A proprietary company can have no more than 50 non-employee shareholders (section 113) — CSF shareholders don’t count toward the cap — and a company that outgrows it, or that lists, must convert to public form (ASIC can compel the change under section 165) and inherits Chapter 2E in full. Listed companies also face the ASX’s separate and stricter related party rules in Listing Rules Chapter 10.
The Exceptions Do Most of the Work
Even where Chapter 2E applies, member approval is not needed if an exception in sections 210 to 216 covers the deal. In practice, four matter:
- Arm’s length terms (section 210). No approval is needed where the terms are those that parties dealing at arm’s length would agree on, or are less favourable to the related party than that. This is the workhorse exception — but it demands evidence. A board relying on it should be able to point to market comparables, an independent valuation or a genuine competitive process, not just a resolution asserting the deal is fair. ASIC’s Regulatory Guide 76 sets out how the regulator expects the assessment to be done and documented.
- Reasonable remuneration (section 211). Salaries, directors’ fees and expense reimbursement don’t need member approval, provided they’re reasonable given the company’s circumstances and the person’s responsibilities — the exception that keeps ordinary payroll out of general meetings.
- Small amounts (section 213). Benefits to a related entity totalling no more than the prescribed amount — currently $5,000, aggregated across the financial year — are exempt. It’s a de minimis rule, not a loophole: it stops nobody structuring a $50,000 arrangement as ten invoices.
- Benefits to all members (section 215). Dividends and other benefits given to a related party in their capacity as a member, on terms that don’t discriminate unfairly against other members, are exempt.
When You Do Need Approval: The Procedure
Where no exception applies, Chapter 2E prescribes the process, and it isn’t quick. The company must lodge the proposed notice of meeting and an explanatory statement with ASIC at least 14 days before the notice is given to members (sections 218–219); ASIC can comment and frequently does. The explanatory statement must give members everything material to deciding whether the benefit is in the company’s interests. At the meeting, the related party who would receive the benefit and their associates must not cast a vote on the resolution at all — in any capacity, for or against — subject only to narrow exceptions such as proxies cast as directed by an unconflicted member, and the approval doesn’t count if the resolution only passed because of votes cast in breach of the ban (sections 224–225). The benefit must then be given within 15 months. For a startup, that is a two-to-three-month round trip — which is why boards plan related party deals around the exceptions, and why “we’ll just paper it later” is not a strategy.
The consequences of skipping it are asymmetric in an interesting way: under section 209 the transaction itself remains valid and the company commits no offence, but every person involved in the contravention — the directors who approved it, the related party who took the benefit — breaches a civil penalty provision, with pecuniary penalties and disqualification on the table, and dishonest involvement is a criminal offence.
Why Pty Ltd Boards Should Behave As If It Applies
If your startup is a straightforward Pty Ltd with no CSF shareholders, Chapter 2E doesn’t bind you. Acting like it doesn’t exist is still a mistake, for four reasons.
First, directors’ duties apply to every company: a founder who puts the company into a self-interested deal on soft terms has sections 181 and 182 to answer, and the disclosure duty in section 191 — along with your constitution’s rules on whether a conflicted director can vote — still governs the boardroom. Second, almost every venture shareholders’ agreement lists related party transactions as a reserved matter requiring investor consent, so the shareholder-approval discipline arrives by contract even where the statute is silent. Third, if the company later fails, a liquidator can unwind uncommercial transactions and unreasonable director-related transactions (sections 588FB and 588FDA) — Chapter 2E-style scrutiny, applied in hindsight. And fourth, money flowing to founder-shareholders on soft terms has tax consequences of its own under Division 7A.
The practical protocol is the same at any stage: disclose the interest early, let the non-conflicted directors run the decision, market-test the terms and record the evidence, minute it properly, and get investor consent where your documents require it. Our business setup and structuring team builds board and shareholder approval frameworks that scale from two founders to a public register, and our startup lawyers in Sydney can sanity-check a related party deal before it becomes a diligence problem in your next round.
This article is general information only, not legal advice — whether Chapter 2E applies, and whether an exception covers your transaction, depends on your structure and the deal’s terms. Viridian Lawyers advises Australian startups on corporate governance, capital raising and board process. If there’s a director on both sides of a transaction you’re about to sign, get in touch.
