In our article published on 5 May 2020, we wrote about the use of section 444GA of the Act by administrators of DOCAs to affect a compulsory transfer of shares.
As noted in that article:
- section 444GA of the Act provides a cost effective and timely method to achieve restructurings and recapitalisations of distressed companies, particularly by way of debt for equity swap. However, where the company is listed (or unlisted but with more than 50 members), it is necessary to seek relief from the Australian Securities and Investments Commission ("ASIC") from the prohibition in section 606 of the Act on a person acquiring more than 20% of the voting power in the company ("ASIC Relief");
- typically, and whilst not previously enshrined in legislation or ASIC policy, ASIC has always required that the deed administrators obtain an independent expert's report ("IER") in relation to the valuation of the company's shares on both a liquidation and going concern basis as a condition of considering whether to grant ASIC Relief; and
- ASIC published a consultation paper in relation to its approach to applications for ASIC Relief in this context in January 2020, with a view to formalising its position on the application of Chapter 6 of the Act to section 444GA transfers into policy.
Following the consultation process, ASIC has now published its updated policy guidance in relation to applications for ASIC Relief in the context of section 444GA transfers, by amending Regulatory Guides 6 (Takeovers: Exception to the general prohibition) and 111 (Content of expert reports).
The updated policy guidance broadly follows the position foreshadowed by ASIC in the consultation paper, and includes the following key points:
- ASIC will require an IER to be prepared in accordance with Regulatory Guide 112. Notwithstanding various submissions that such a report may be considered unnecessary in circumstances where there is likely to be significant overlap between an IER and the statutory report which administrators are required to prepare for creditors prior to approval of the DOCA, and that, unlike other transactions where an IER is required, shareholders have no rights to approve or reject a section 444GA transfer (other than by opposing the application for leave to transfer), ASIC remains of the view that an IER is necessary to provide sufficient protection to shareholders' rights.
- ASIC will no longer require that IERs value the company on a going concern, and IERs are required only to opine on whether there is any residual equity value for shareholders on a liquidation basis. As noted in our previous article, this change is to be welcomed because the valuation of a company the subject of a proposed section 444GA transfer on a going concern basis is illusory and potentially confusing in circumstances where the only viable alternative to the s444GA transfer is liquidation, and adds unnecessary expense and delay to the valuation exercise.
- The IER must be prepared by an independent expert, and not by the company's deed administrator or another member of the administrator's firm.
ASIC has not adopted some submissions which would have removed the need for an IER in each and every case involving a section 444GA transfer of a listed company's shares. However, by confirming its approach to applications for ASIC Relief in such circumstances, ASIC has at least provided certainty for the industry going forward, which will assist deed administrators in budgeting and planning for the implementation of such DOCAs in the future.
Authored by James Hewer and Scott Harris.