The Federal Court has again approved administrators of a deed of company arrangement (DOCA) transferring all the shares in the company without the consent of the shareholders. This flexibility allows investors the option (with leave of the Court) to restructure and save failing ventures and to compulsorily acquire all the shares in the company. Although this power has not yet been applied to a listed company, we think the decision improves the prospects of this power being applied to listed companies and for ASIC to grant the required relief against the takeover prohibition in Chapter 6 of the Corporations Act.
The decision of the Federal Court in Lewis in the matter of Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement)  FCA 53 is the third time we are aware that the Court has been willing to use the power granted in section 444GA of the Corporations Act 2010 (Cth).
Section 444GA was inserted into the Corporations Act in 2007. It allows an administrator of a DOCA to transfer shares in the company with leave of the Court. The Court can only grant leave “if it is satisfied that the transfer would not unfairly prejudice the interests of the members of the company”.
The first decision (Weaver v Noble Resources Ltd (2010) 41 WAR 301) on this section allowed a 90% majority shareholder to acquire the 10% minority shareholder’s stake against its will and without compensation. The Court held that the shares were essentially worthless, and the desire of a buyer to acquire them did not contradict this position. The willingness to acquire the shares was for ease of implementing the restructure and recapitalisation. In the second decision (Munday Group Pty Ltd v Tsourlinis Distributors Pty Ltd  FCA 1488), the Court stated that section 444GA was designed to prevent shareholder “blackmail” by refusing to transfer its shares in situations where the shares have only tactical value but not economic value.
Diverse Barrel Solutions Pty Ltd (DBS) is a “start-up” in the business of manufacturing and rejuvenating wine barrels for a number of customers in South Australia, Victoria and Western Australia. It invested heavily in research and development and patenting the technology it developed to extend the useful life of wine barrels, however, DBS has made significant losses for the past 3 financial years. Pinara Group Pty Ltd was providing significant financing to DBS. Pinara also was a 51% shareholder of DBS and a secured creditor.
In October 2013, Pinara informed DBS that it was no longer willing to continue to finance its operations alone. As a result of uncertainty around its funding, the directors of DBS resolved to place it in voluntary administration. In November 2013, the creditors executed a DOCA under which all the shares in DBS not held by Pinara were to be transferred to Pinara.
Although the administrators sought the consent of the remaining shareholders to the DOCA, only shareholders representing, collectively, 19% of the share capital consented. The applicants then sought leave of the Court to transfer the remaining 30% of the shares in DBS to Pinara in accordance with the terms of the DOCA.
The Court granted the leave. Key factors in this decision included that:
- the Court concluded that on the evidence the shares in DBS have no residual value and it is likely to be considerable time, if ever, before they do gain some value (effectively dismissing the argument that some commentators make that value should be attributed to the existing equity for the company’s growth prospects if it can be rehabilitated);
- on winding up, the unsecured creditors of DBS would receive no return, whereas under the proposed DOCA the majority of creditors would receive payment in full; and
- several of the affected shareholders consented to the transfer (the applicants were unable to make contact with a number of shareholders and another shareholder expressed a neutral attitude to the transfer). None of the affected minority appeared before the court to object. The Court did not exclude altogether the possibility that those shareholders with whom the applicants have not been able to make contact may voice some objection to the transfer. However it concluded that given the financial status of DBS it seemed improbable that any objection could lead to a conclusion that the shares in DBS have any residual value.
In both the Munday Group decision and the Weaver decision, the Court heard the objections of a shareholder to the transfer of shares but determined that those objections were not ultimately valid as the shares were worthless.
Impact for public companies and scope for flexibility in “loan to own” transactions
So far, all decisions on section 444GA have concerned unlisted companies. As a result, uncertainty remains how this provision will interact with Chapter 6 of the Corporations Act, in particular the 20% prohibition (takeovers prohibition) that applies to listed companies and unlisted companies with more than 50 members. To acquire more than 20% of such companies from an administrator under a DOCA, besides leave of the Court under section 444GA, the acquirer will require relief from ASIC from the takeovers prohibition. The DBS decision is the first time section 444GA has been applied to a relatively diversely held shareholding, although DBS is not a company to which the takeovers prohibition applies.
There is no exception in Chapter 6 to the takeovers prohibition for an acquisition of shares by a DOCA, even if it is court approved. However, in 2002 in Pasminco  ATP 06, the Takeover Panel allowed an administrator to transfer shares to creditors without complying with the takeovers prohibition in a rescue situation. The Panel modified the takeovers prohibition to allow a share transfer under a DOCA accepting the administrators' submissions that there was no value in the shares. This allowed the administrators to use the value of the corporation for the benefit of the creditors (in that case its listing and shareholder spread).
We are not aware of an ASIC modification to the takeovers prohibition to allow an acquisition of shares in a listed company (either before or since the introduction of section 444GA of the Corporations Act). Nonetheless, as a matter of policy, in the context of transferring shares in a distressed company, there is no reason to distinguish between private and public companies. Rather, the test that the transfer should not unfairly prejudice the interests of the members of the company, should adequately protect members of both public and private companies.
Interestingly, the English Takeovers Panel has a "rescue operations" exception to the equivalent Chapter 6 provisions, which allows the Panel to grant an exemption where there is protection for independent shareholders which it considers satisfactory in the circumstances. As a result, we think there is adequate scope in both law and policy for ASIC to grant a modification to the takeovers prohibition in the appropriate circumstances. Nonetheless, we do expect that where leave is sought under section 444GA for a listed company, the Court is likely to require the appointment of a “contradictor” to ensure that the case against a Court mandated share transfer is fully heard.
As a final comment, we note that ASX does not require shareholder approval for the disposal of a listed company’s main undertaking, where the disposal is by a receiver acting on behalf of a secured creditor or creditors under a charge or other security instrument, or by an administrator or liquidator acting under their statutory powers. Since 2012 this also applies to an administrator disposing of an ASX-listed company’s main undertaking under a DOCA.
However, the ASX requires shareholder approval for a disposal by a listed entity of its main undertaking as part of a plan to pay down debt or recapitalise its balance sheet, even if the transaction is instigated to avoid or cure a default under its financing agreements and to avoid the appointment of a receiver, administrator or liquidator. So the ASX also applies a test to protect shareholders. In this case the test is effectively that the disposal is genuine and not a sham using a threat to avoid shareholder approval.
Placing a company in administration is a significant decision and has its own problems. However, we do see the DBS decision as consistent with the momentum towards preventing shareholders from blocking rescue deals where their shares have no economic value.