Section 444GA share transfers & Chapter 6 relief
ASIC has recently released a proposal for consultation in order to clarify what is needed to be provided by an administrator in order to obtain relief under section 606 of the Corporations Act 2001 (Cth) (the Act) to effect a transfer of shares proposed in a deed of company arrangement pursuant to section 444GA of the Act.
ASIC should in doing so seek to balance process and pragmatism. To achieve the correct outcome, it will require the regulator to find the appropriate balance between the objectives of Part 5.3A of the Act and the operation of Chapter 6 of the Act.
When is ASIC approval needed?
Relief under section 606 of the Act is only required where a deed of company arrangement (DOCA) contemplates a transfer of shares with leave of the Court under section 444GA(1)(b) and where the transferee’s voting power will increase to be more than 20% of the voting power in a public company (listed or otherwise) as a result of the transfer (444GA Control Transaction).
What does ASIC’s proposal mean?
ASIC’s current proposal is to grant relief if the following are satisfied:
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an Independent Expert Report (IER) has been prepared on a liquidation basis;
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the IER has been prepared by an independent expert (i.e. not the administrator); and
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the IER and explanatory materials have been provided to shareholders prior to the section 444GA hearing.
It is positive the regulator will no longer require the IER to be prepared on both a going concern and liquidation basis. Further there should be no issue with the suggestion the materials are provided to the shareholders in advance of the section 444GA hearing. This will allow interested parties the opportunity to decide whether to appear (noting to date no section 444GA application has been successfully challenged by shareholders).
Our view
The following issues in our view require the most in-depth analysis and exploration by ASIC, especially in light of the objectives of Part 5.3A of the Act:
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Whether the IER should be prepared in accordance with RG 111 (i.e. what level of information is required to be included and methodology adopted)?
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Whether the IER should be prepared in accordance with RG 112 (i.e. precluding the administrator or another member of the administrators’ firm or party associated with the firm from being the independent expert)?
The position adopted on these two questions will, in our experience, likely have a direct impact on the cost, time and success of any proposed 444GA Control Transaction. This in turn may impact the return available to creditors and the ultimate survival of the underlying business.
Independence
ASIC has expressed some concerns around bias (or at least the perception of it) if the IER is prepared by the administrators themselves.
Administrators are required, pursuant to section 436DA of the Act and the ARITA Code, to prepare a ‘Declaration of Independence, Relevant Relationships and Indemnities’ (DIRRI) to establish independence shortly after appointment. Creditors and interested parties have an opportunity to raise concerns about independence at the first meeting of creditors or otherwise following the provision of the DIRRI.
We are not convinced an administrator’s independence is somehow compromised or altered as a result of needing to undertake steps (including by preparing an IER) to implement a 444GA Control Transaction approved by creditors. Further, shareholders have and should be encouraged to take comfort from the fact they are owed duties by the administrators in their capacity as fiduciaries and officeholders.
Interestingly, ASIC itself acknowledges, in previous examples involving the granting of relief, an IER prepared by administrators was acceptable.
In the decision of Re Mirabela Nickel Ltd [1] (Mirabela), for example, ASIC:
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consented to the administrators preparing an IER for the review of shareholders; and
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were satisfied their engagement did not affect their independence by preparing it.
Partner Nicholas Edwards was involved in the Mirabela transaction and significantly, the Court saw no reason to interfere with ASIC’s assessment. In this instance, allowing the administrators to prepare the IER resulted in cost-savings and a greater return to creditors.
Our suggested alternative approach
In our view there would be merit in ASIC exploring an alternative approach involving a regulatory guide which imposes additional information requirements for an administrator’s report to be prepared pursuant to Rule 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Report to Creditors). Such additional requirements would only be required in circumstances where a DOCA proposal is put forward which involves a 444GA Control Transaction.
In such circumstances, the guidelines could stipulate the Report to Creditors ought to contain a valuation analysis which complies with or substantially complies with Regulatory Guide 111, in addition to ordinarily applicable standards.
In complying with such a requirement, administrators could elect, if appropriate and depending on the nature of the assets, to engage third party experts to assist in the preparation of that section of the report. Any such engagement would be disclosed and the purpose of the engagement would be explained in the report.
The Report to Creditors would then be issued to creditors in the ordinary course prior to the second meeting of creditors as well as to shareholders and ASIC (along with any required explanatory materials in due course).
The focus on a more robust Report to Creditors would have obvious benefits, including:
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a streamlined process;
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avoiding additional costs associated with a separate and stand-alone IER;
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reduced likelihood of duplicating information across separate reports;
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reduced delays often associated with commissioning a separate IER;
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ease of access to information for all parties (including unsophisticated investors); and
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facilitation of efficient and effective corporate restructures.
What next?
Hamilton Locke will be providing a response to the consultation paper, which is due by 28 February, on the basis outlined in this article. If you have any views about the proposal, please contact us for inclusion in our response. ASIC expects to release their regulatory guide in May at which time we will provide a further update.
The information contained in this article is for information purposes only and does not constitute legal advice.
About the authors
Nicholas Edwards is a Partner who specialises in advising on contentious and non-contentious issues arising from large-scale corporate distress.
Shannon McCarthy is a banking and finance lawyer with a focus on corporate finance.
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