ASIC releases consultation paper on s444GA transfer of shares

ASIC has released a consultation paper seeking feedback in relation to its proposed new policy for Chapter 6 relief for share transfers under section 444GA of the Corporations Act¹ (Act).  The paper is available here.

Background

Section 444GA of the Act empowers a deed administrator to transfer shares, as part of a deed of company arrangement, either with the written consent of the owner of the shares, or compulsorily with leave of the Court.

The Court may only grant leave under section 444GA(3) where it is satisfied that the transfer would not unfairly prejudice the interests of the members of the company.

The ASIC paper outlines a few subtle but important changes to how ASIC will approach section 444GA applications.

How do the courts approach s444GA applications?

In determining applications under section 444GA(1)(b), the courts have consistently considered that a proposed share transfer cannot be unfairly prejudicial where the shares have no value and there is no prospect of them obtaining value.

In Weaver v Noble Resources Ltd,² Martin CJ observed that the possibility of prejudice would arise if there were some residual equity in the company.³

In Lewis, In the matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement),⁴  White J stated that the following factors may evidence unfair prejudice:

• whether the shares have any residual value which may be lost to the existing shareholders if leave is granted;
• whether there is a prospect of the shares obtaining some value within a reasonable time;
• the steps or measures necessary before the prospect of the shares attaining some value may be realised; and
• the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence.  A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted.

ASIC’s role and previous position

As there is no statutory exception to the takeovers prohibition in s606 of the Act for s444GA transfers, any transfer prohibited by that section (a Chapter 6 Transfer) requires ASIC approval.  A typical example is a s444GA application for the transfer of all of the shares (or more than 20%) of the shares in a listed company. 

To date, in granting Chapter 6 relief for transfers under section 444GA, ASIC has generally made the relief conditional on:

• being provided with an independent expert report (IER), prepared in accordance with Regulatory Guide 111 (RG111), valuing the company on both a going concern and liquidation basis;
• shareholders being provided with an explanatory statement that explains the nature of the application and their right to object, as well as providing links to the IER and the originating court process; and
• the Court granting leave under section 444GA(1)(b).

However, ASIC has not previously had a formal policy regarding its approach to these transactions.

ASIC’s proposed policy for section 444GA transactions

ASIC’s proposed requirements include:

• explanatory materials being made available to shareholders before any section 444GA hearing, including an IER prepared in compliance with RG111;
• the IER being prepared on a liquidation basis (where the only alternative is liquidation); and
• the IER being prepared by an independent expert.

The first requirement should not make any real difference to how section 444GA applications are run in practice, given the existing approaches taken by the courts and by ASIC.

However, the other two requirements do raise some important issues.

Going concern vs liquidation valuation

Historically, ASIC has required an IER to be prepared on both a going concern and liquidation basis.  However, ASIC now proposes to dispense with the requirement that an IER be prepared on the basis of a going concern valuation and to, instead, rely solely on a liquidation valuation where the only alternative is liquidation.
This approach has been adopted because, among other things:

• a going concern valuation for a company under administration may be a hypothetical exercise; and
• the Court does not require a going concern valuation for the purposes of determining an application under section 444GA(1)(b) once the Court is satisfied that the only likely alternative is liquidation.

We consider that this is a sensible and positive change.

Independence of expert

ASIC’s final proposal is that the IER should be prepared in compliance with the principles set out in Regulation Guide 112, such that the deed administrator (and any associated party) should be precluded from authoring the IER.

ASIC has stressed the need to avoid the perception of a lack of independence, noting a number of circumstances in which it may be problematic for the administrator to act as the expert, including where:

• the administrator has assisted the DOCA proponent to formulate the DOCA proposal; and
• there is a possibility that the administrator’s ability to recover fees is dependent upon the success of the DOCA.

While this actually reflects the approach that ASIC has been taking in relation to section 444GA applications for some time now, it will be useful to have the position set out in a formal policy to reduce the uncertainty around this issue.

Lavan comment

A formal ASIC policy in relation to its approach to s444GA applications will provide greater certainty for deed administrators and stakeholders as to ASIC’s approach.  While the proposal is largely in line with existing practice, a key change (if the proposal is adopted), is the basis on which the valuation is to be prepared.

Deed administrators should note that ASIC approval is not required in relation to transfers that are not Chapter 6 Transfers.