This week’s TGIF considers In the matter of Ten Network Holdings Limited (subject to a deed of company arrangement) (recs and mgrs apptd) [2017] NSWSC 1529, which held that transferring shares under a DOCA wasn’t unfairly prejudicial to shareholders, as the shares had no value.

The story so far

After the listed entity Ten Network Holdings Ltd (Ten) and other Ten Group companies went into voluntary administration on 14 June 2017, two recapitalisation proposals were put forward. One was jointly proposed by Birketu and Illyria and the other by CBS.

Following an unsuccessful challenge to the sufficiency of the Administrators’ report on the proposals, and to the right of CBS to vote at the second creditors’ meeting in favour of its own proposal, Ten Group’s creditors voted in favour of a CBS proposal and approved the execution of a deed of company arrangement (the CBS DOCA). See our 22 September 2017 TGIF here for a summary of that challenge.

One of the conditions precedent to completion of the CBS DOCA was an order being made under s 444GA of the Corporations Act 2001 (Cth) granting leave to the Deed Administrators to transfer all the shares in Ten to CBS (or its nominee).

The Deed Administrators thus applied to the Court for the requisite leave.

The opposition

Only members, creditors, ASIC or other ‘interested persons’ may oppose a grant of leave sought under this section. Three Ten shareholders (Opposing Shareholders) objected to the grant of leave on the basis that the transfer of Ten shares to CBS would be unfairly prejudicial to their interests.

No unfair prejudice where the shares have no value

The Court found that the transfer of shares pursuant to the CBS DOCA would not unfairly prejudice Ten’s shareholders and observed that, on such an application, a relevant matter to consider included whether the shares had any ‘residual value’ which may be lost if leave were granted.

The Court accepted the Deed Administrators’ evidence that there was no present economic value in Ten’s shares, strongly rejecting the Opposing Shareholders’ criticisms that the expert report had been manipulated to demonstrate that Ten’s shares had no value.

Other forms of prejudice?

Furthermore, the Court rejected the Opposing Shareholders’ arguments that proprietary rights in shares are inviolable. While the Court agreed that shares can have a proprietary quality, they were not inviolable in the context of s 444GA, which provides a discretion to the Court to authorise a transfer of shares in certain circumstances. It also recognised that the regime established for decision-making in relation to voluntary administrations largely excludes shareholders, whose interests are somewhat subject to the interests of creditors.

The Court also held that Birketu and Illyria’s alternative DOCA proposal was not capable of implementation as Ten’s creditors decided in favour of the CBS DOCA.

As such, leave was granted to the Deed Administrators to transfer the shares to CBS (or its nominee) pursuant to the CBS DOCA, finding that the transfer would neither prejudice, nor unfairly prejudice the interests of shareholders.

The appropriate counterfactual

One issue the decision touched upon briefly was whether in identifying any prejudice, it was appropriate to examine the value of the Ten shares if Ten were wound up or to examine the value of Ten shares if the CBS acquisition proceeded by way of an alternate transaction.

In simple terms, the alternate transaction in question was a transaction whereby CBS would acquire all of Ten’s assets leaving Ten with only liabilities, with the result that the shares in Ten would have no value.

While not deciding the issue, the Court indicated that the appropriate counterfactual for valuation purposes was that of the winding up of Ten.

Section 444GA allows a deed administrator to approach the Court for leave to approve a share transfer where necessary to implement a deed of company arrangement. The provision facilitates such transfers in circumstances where to seek written consent of the owner of the shares is impractical.

Leave will only be granted if the Court is satisfied the sale does not unfairly prejudice the interests of shareholders. If the evidence demonstrates that the shares have no residual value, and the members are unlikely to receive any distribution in a winding up or realistic alternative to winding up, the possibility of prejudice will not arise.