On 22 October 2020, the Australian Securities and Investment Commission (ASIC) announced changes to its requirements for applications for relief from the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth) (the Act) in connection with shares being transferred via a deed of company arrangement (a DOCA) and section 444GA of the Act.
While it is still necessary to seek ASIC relief from Chapter 6 (where it would otherwise apply) and such application still requires an independent expert report to demonstrate that the shares being transferred are of nil value (rather than a valuation undertaken by the administrators), updated ASIC guidance now provides that the valuation need only be prepared on either a liquidation or going concern basis (rather than both as was previously required). Which methodology is appropriate will be depend upon the likely consequences for the company of the share transfer not being approved, but in most cases it can be expected that it will be the liquidation basis.
In this article we discuss:
- section 444GA share transfers;
- when ASIC relief is required in respect of section 444GA transfers;
- the process for seeking ASIC relief; and
- ASIC’s updated guidance regarding the valuations and expert reports required for relief applications.
Section 444GA share transfers
DOCAs are frequently used in voluntary administrations to facilitate the sale of a financially distressed company’s business to new owners.
Whilst frequently this may take the form of an asset transfer, the DOCA process also allows a transfer of the shares in the company itself pursuant to section 444GA of the Act.
A share transfer can be preferable to an asset transfer for various reasons, including the need in many cases for third party consents to transfer assets or contracts, taxes, duties or other costs that may arise from such an asset transfer, or simply the time and logistical disruption involved in such a process. Given the distressed situation, such a share transfer will generally be accompanied by a debt compromise under the DOCA rendering the company solvent and viable as a going concern under the new owner.
Similarly, a DOCA may also provide for a “debt for equity swap” by one or more of the company’s creditors, under which they compromise some or all of their debt in exchange for the receipt of equity in the company. Such equity could either be newly issued or transferred from the existing owners.
Section 444GA allows an administrator to transfer shares in a distressed company either with the written consent of the shareholders, or with the leave of the Court.
Given companies must be under administration to propose a DOCA (and thereby are insolvent or are likely to become insolvent), there is usually no return to shareholders under a DOCA, and therefore there may be little incentive for shareholders to consent to a transfer of their shares. Where the shares are widely held, such as an ASX listed company, obtaining consent of all shareholders is practically impossible.
As a result, the parties to a DOCA involving a widely held company will frequently seek to transfer the shares in the company for no consideration and on a compulsory basis by obtaining the leave of the Court under section 444GA.
When ASIC relief is required for section 444GA transfers
There is an additional requirement where the section 444GA transfer involves the transfer of shares in listed companies, or unlisted companies with more than 50 members. In such cases, the parties will often also need to obtain ASIC relief from the operation of the takeover provisions in Chapter 6 of the Act.
This is necessary where, in broad terms, the section 444GA transfer would result in the acquiring party (together with their associates) acquiring or increasing their voting interest to above 20% of the total voting rights in the company. ‘Associates’ is broadly defined in the Act and includes all entities within the same corporate group, as well as persons who are deemed to be working together for the purpose of influencing the composition of the target company’s board of directors or its management, or working together in relation to the target company’s affairs. Exceeding the 20% threshold results in the acquisition being technically prohibited under section 606 of the Act unless an exception applies.
As share transfers which occur under a DOCA do not fall into any of the exceptions to section 606, ASIC relief is required to avoid this technical breach of the Act.
Making an application for ASIC relief
ASIC may grant relief to a potential acquirer of shares from the takeover provisions in Chapter 6 of the Act. ASIC will determine whether to exercise this power upon receiving an application from the acquirer providing the necessary information on the transaction.
In general, an application for relief from the provisions of Chapter 6 will be granted for a share transfer under section 444GA where:
- explanatory materials are provided to shareholders at least 14 days prior to the court hearing where leave is sought for the transfer;
- an independent expert report confirms that the shares to be transferred are of nil value;
- the expert report is prepared by someone other than the administrator of the company whose shares are being transferred (or a member of that administrator’s firm); and
- the Court grants leave under section 444GA of the Act.
In January 2020, ASIC released Consultation Paper 326 (Consultation Paper) seeking industry feedback regarding the appropriate circumstances for relief to be granted for share transfers under s 444GA, focusing on whether ASIC should continue to require independent expert reports to be prepared according to points 2 and 3 above.
Fifteen responses were received by ASIC in response to the Consultation Paper, including submissions from Herbert Smith Freehills. For more information on the Consultation Paper, see HSF’s Legal Briefing.
Updated guidance for expert reports
Following the Consultation Paper, ASIC has updated its regulatory guidance on the content of expert reports. The updated guidance contains the following requirements for expert reports going forward:
- the requirement to prepare an expert report showing no residual value for equity holders has been maintained;
- expert reports must still be prepared by experts who are ‘independent’ of the appointed external administrator; and
- ASIC will only require a valuation to be undertaken on one basis, and that will generally be the liquidation value, rather than the going concern value.
The new requirements are discussed below.
New approach to basis of valuations
ASIC now only requires a valuation to be undertaken on one basis, and that will generally be the liquidation value, rather than the going concern value.
With respect to the basis of the valuation, the updated guidance states that:
The value of shareholders’ residual equity should be assessed on the basis that the company is in administration.
Consistent with the approach of the courts, an expert should generally value shareholders’ residual equity in a company under administration on a ‘winding up’ or ‘liquidation’ basis where that is the likely or necessary consequence of the transfer of shares not being approved.
The normal outcome for a company in administration where a DOCA is not approved or otherwise fails (as would presumably be the case if the share transfer was not approved) is that the company enters into liquidation, and the business ceases to operate as a going concern. Therefore the approach under the updated guidance would generally result in a liquidation valuation.
However, this will not always be the case, and it will be necessary to consider in each case what the likely outcome would be if leave to transfer the shares is not granted. ASIC’s updated guidance states in this regard:
We expect in many cases that it will be clear from the administration process whether the company under administration holds a business (or businesses) capable of sale or, rather, a series of assets that, but for the proposed DOCA, would otherwise be sold on a piecemeal basis to realise value (if any).
Where a company under administration holds assets that form a business, the expert should generally base the assessment on the higher of:
- the sum of liquidation value of the underlying business assets; and
- the value of the business as a whole.
This approach appears in line with that taken by the courts when considering a section 444GA transfer and whether shareholders have been unfairly prejudiced by such a transfer.
Going forward, experts will now need to form a judgment as to which valuation method is appropriate for the business.
Independent report still required
ASIC also considered whether an IER should be prepared by experts who are ‘independent’ of the appointed external administrator, and able to satisfy the requirements of ASIC’s Regulatory Guide 112 (Independence of Experts). In practice this was a question of whether the IER should be able to be prepared by the administrators of the company (or members of that administrator’s firm) or by an entirely independent adviser.
ASIC considered that the appearance of independence requires that an expert who prepares an IER comply with the requirements of RG 112, given independence of an expert is considered critical for the protection of security holders.
In the Consultation Paper, ASIC noted that avoiding the perception of a lack of independence may be difficult for an appointed administrator, owing to:
- the administrator’s role as agent of the company resulting in them operating as both commissioning party requesting the IER and expert providing it;
- the strategic planning role administrators often perform in connection with a DOCA; and
- the possibility that an administrator’s fees may be dependent upon the success of the DOCA in some circumstances.
Accordingly, ASIC concluded it was not appropriate for expert reports to be prepared by a company’s administrator, or members of that administrator’s firm.
While it is important that valuation evidence be obtained in the context of a transfer of shares pursuant to a DOCA, it is disappointing that the requirements to obtain ASIC relief in respect of section 444GA were not further streamed lined.
The rationale for requiring ASIC relief in insolvency situations (notwithstanding that such relief is in practice typically granted) remains unclear, given shareholders will rarely receive a return following the appointment of administrators. In the rare situation that creditors do have residual value in a company the subject of a DOCA proposal, shareholders’ interests are already protected by the requirement for Court approval if the shareholders do not consent to the transfer. To grant leave, the Court must be satisfied (based on valuation evidence) that there would be no unfair prejudice to shareholders as part of the transfer.
The Court is accustomed to scrutinising valuation evidence, and requiring an independent report that:
- conforms to the requirements in Regulatory Guide 112 (Independence of Experts); and
- is prepared by an expert who meets the requirements in Regulatory Guide 112 (Independence of Experts),
creates an added layer of costs, where it is not clear that additional scrutiny is needed to protect shareholders of insolvent companies.
If a separate valuation is to be submitted to ASIC, it is unclear why this cannot be prepared by the administrators. The administrators will be familiar with the business, and will have needed to form some views as to value as part of that process. This suggests that the administrators would be best placed to provide such a valuation for the least additional cost. Administrators are required to be independent under section 448C of the Act. We are not convinced that the fact that administrator fees might in some circumstances be contingent on a DOCA proposal (or any ‘strategic role’) is in and of itself sufficient to outweigh administrators carrying out such a valuation in most circumstances.
While administrators will welcome the updated guidance that ASIC has delivered as an incremental improvement upon the status quo, undertaking section 444GA share transfers as part of a DOCA will continue to be a relatively involved process due to the dual requirements of Court approval (where shareholders do not consent) and the preparation of an expert report by an independent third party with no prior involvement in the administration.
 Australian Securities & Investments Commission, Content of expert reports (Regulatory Guide 111, October 2020) [111.77].
 Voting interest is determined under s 610 of the Act.
 Corporations Act 2001 (Cth) s 655A.
 Australian Securities & Investments Commission, Takeovers: Exceptions to the general prohibition (Regulatory Guide 6, October 2020).
 Australian Securities & Investments Commission, Chapter 6 relief for share transfers using s 444GA of the Corporations Act (Consultation Paper No 326, January 2020).
 Australian Securities & Investments Commission, Content of expert reports (Regulatory Guide 111, October 2020) [111.72]-[111.73].
 Ibid [111.77].
 We note that it would technically be the responsibility of the acquiring party to seek ASIC relief from the requirements of Chapter 6 of the Act, and therefore technically the acquiring party’s obligation to engage the independent expert. However, in practice, both the acquiring party and the administrator would be involved in IER process.
 Weaver v Noble Resources Ltd  WASC 182 at ; Re Mirabela Nickel Ltd (subject to deed of company arrangement)  NSWSC 836 at .