Justice Black has confirmed in his written reasons for judgment in ReNexus Energy Ltd (subject to deed of company arrangement)  NSWSC 1910 (Nexus) the utility of section 444GA to achieve debt for equity restructures of listed companies.
This decision represents the seventh occasion a Court has granted leave under section 444GA of the Corporations Act 2001 (Cth) (Act) enabling deed administrators to transfer shares in a company subject to a deed of company arrangement without the consent of the shareholders, and only the second occasion it has been used in relation to a listed company following on from the successful restructure of Mirabela Nickel Limited (Mirabela) in 2014.
The decision affirms that:
- A robust valuation indicating where the value of the Company breaks is critical in convincing a Court that no unfair prejudice will result to shareholders from the transfer.
- Where there is no residual value for shareholders in a liquidation and it is clear other stakeholders (such as creditors and employees) will benefit there can be no prejudice to shareholders, let alone unfair prejudice.
- The Court will not consider speculative alternatives in assessing the proposal before it.
- The deed administrators bear the burden of proof to show that the proposed transfer is not unfairly prejudicial to shareholders.
Nexus Energy Limited is an Australian resource exploration and production company with interests in oil and gas assets in Australia. Due to ongoing disputes and a shortfall in income generation Nexus was in an increasingly distressed position.
In February 2014, the Seven Group made a conditional offer to acquire all of the shares in Nexus for approximately 5c per share. Subsequently, a scheme of arrangement was announced between Nexus and a subsidiary of the Seven Group, SGH Energy (No 2) Pty Ltd (SGH), under which all of the shares in Nexus would be acquired for 2c per share. At the members’ meeting on 12 June 2014 the scheme failed to obtain the required shareholder approval and the board of Nexus placed the company into voluntary administration.
Network Investment Holdings Pty Ltd (NIH), a subsidiary of the Seven Group, had acquired the senior debt piece and the majority of secured convertible notes issued by Nexus (Notes). On 24 June 2014, following the appointment of administrators, NIH accelerated the senior debt. NIH also provided interim financing to the administrators in order for Nexus to continue to operate.
The voluntary administrators sought proposals in respect of Nexus, its subsidiaries and assets. The only proposal received was a deed of company arrangement (DOCA) proposed by SGH2. The voluntary administrators’ report under section 439A of the Act, issued to creditors on 4 August 2014, was accompanied by an expert report which concluded that creditors would achieve a better result under that proposed DOCA than in a liquidation of Nexus.
A DOCA was approved at the second creditors’ meeting on 11 August 2014 and executed on 22 August 2014. In summary, the DOCA provided that in consideration for receiving the transfer of all shares in Nexus, SGH2 would:
- pay the full amount of the senior debt (including interim funding) in the order of approximately $82.6 million;
- pay 74.5¢ in the dollar for principal and interest accrued under the Notes (other than NIH);
- pay an amount due under a settlement agreement to a third party Nexus was in dispute with;
- recognise employee priority claims in full; and
- pay an amount which is expected to be sufficient to pay trade creditors.
On 24 December 2014, the Supreme Court of New South Wales granted leave under section 444GA for the deed administrators of Nexus Energy Limited (subject to deed of company arrangement) to transfer all of the existing ordinary shares to SGH. The DOCA was effectuated shortly thereafter.
Power to transfer
Section 444GA of the Act provides that a deed administrator may transfer shares in a company with consent of the owner of the shares or with leave of the Court. The Court can grant leave only if “it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.” This provision ensures that existing shareholders are afforded a level of protection and consideration, through the Court process, while allowing creditors, or others, to acquire the equity interests when it is fair to do so.
Precedent on this section has strongly indicated that where shares will have no value in a liquidation alternative there can be no prejudice, let alone unfair prejudice. Critical to this assessment is the valuation of the company in question and where in fact the value breaks (i.e. in the debt or the equity).
Justice Black’s judgment aligns with the pre-existing jurisprudence on non-consensual transfers under s 444GA. His Honour followed the valuation-based approach to ‘unfair prejudice’ that Martin CJ had expounded in Weaver v Noble Resources Ltd  WASC 182 (Weaver).
Despite contrary evidence being presented by experts engaged by each of the deed administrators and shareholders, Justice Black was satisfied there was no prospect of the shares obtaining value within a reasonable time, and there was no suggestion that the shareholders could or would fund Nexus to provide such time.
Counsel for the shareholders proposed that SGH might make a more favourable offer if the present transaction were not approved and that this amounted to prejudice. However, his Honour stated that such a proposition was speculative and, if one were to engage in speculation as to that matter, it would be equally possible that secured assets would be sold within a liquidation or receivership to repay the debts owed to NIH, with the loss in value involved in that process being borne in part by creditors with no amounts available to shareholders.
His Honour, following Weaver, also rejected the argument that value should be attributed to the shares because, absent a transfer of those shares by operation of s 444GA, SGH might be required to negotiate to acquire them. His Honour stated that such a view was inconsistent with the statutory purpose of the provision and that there would be little scope for application of the section in any instance where a shareholder objected to his or her shares being acquired, and even if they had no residual value, shareholders could resist the application on the basis that there was “prejudice” or “unfair prejudice” because they were deprived of the opportunity to force the transferee to negotiate with them to achieve a transfer, or to decline to transfer those shares if their expectations were not met.
Given this and the evidence before him, Justice Black was satisfied that the proposed transfer of shares to SGH did not involve prejudice to shareholders in Nexus and if contrary to that view, there was prejudice, it would not amount to unfair prejudice, given the benefits that the transaction will deliver to other constituencies, independent of SGH and NIH, including trade creditors, noteholders other than NIH, employees and those who will benefit from the continuance of the underlying business of the operating subsidiaries.
In Nexus certain shareholders mounted a sophisticated and coordinated opposition to the s 444GA application. Nexus is not the first application under s 444GA to which shareholders have dissented but it is the first such application in which shareholders have launched a sophisticated counter-attack at the hearing of the application (including the use of counter expert evidence in terms of valuation).
The onus of proof in an application for leave under s 444GA lies with the deed administrators. They must satisfy the court that leave ought to be granted and that shareholders would not suffer unfair prejudice as a result of the transfer. Dissenting shareholders, in contrast, bear a mere evidentiary burden. The dissenting shareholders in Nexus sought to capitalise on the deed administrators’ onus of proof by endeavouring to impugn the deed administrators’ valuation evidence. The dissenting shareholders advanced valuation evidence in reply and cross-examined the deed administrators’ valuation expert.
Although the shareholders’ challenge was unsuccessful, Nexus may foreshadow increased shareholder opposition to s 444GA applications. Sophisticated shareholders with significant financial resources may perceive sufficient value in their shares to oppose the application under s 444GA, including by obtaining counter valuation evidence. Shareholder opposition can delay the effectuation of the DOCA and increase the costs of the restructure. Such a development would be at odds with the purpose of section 444GA which is intended to reduce the scope for shareholders to hold up or disrupt a restructure.
Implications of decisions
The Nexus decision reaffirms the utility of s 444GA to effect debt for equity restructures. In instances where the value of the pre-existing equity is nil on a liquidation scenario majority creditors with loan to own ambitions can put forward a restructure proposal through a DOCA with a degree of confidence. Although the active and coordinated dissent by shareholders in this instance elongated the timeframe for effectuation, given the right circumstances and statutory time frames contained in Part 5.3A of the Act such restructures can be implemented in shorter time frames compared to creditors scheme of arrangements.
An area to watch will be the resources and mining services sector. Given the continuing decline in commodities prices and companies struggling to meet debt burdens, s 444GA restructures could be used with greater frequency.