It is common for deed administrators, as part of a restructuring involving a deed of company arrangement (DOCA), to seek the leave of the Court to transfer the shares held in the company to the proponent (or nominee) on the basis that the purported transfer would not unfairly prejudice the interests of the members of the company (see section 444GA(1)(b) of the Corporations Act 2001). This is a powerful tool, as once leave is granted and the relevant regulatory approval is obtained, the deed administrators can compel the transfer of shares held by third party shareholders in the company.
When Courts grant section 444GA(1)(b) leave, the orders are typically subject to the regulatory approval of the Australian Securities and Investments Commission (ASIC) and, where appropriate, the Foreign Investments Review Board (FIRB). From an ASIC perspective, the proposed transfer of shares will require ASIC relief from Chapter 6, as such an appropriate application for ASIC relief is usually made promptly following the grant of the leave.
FIRB however might be another matter, and that raises an interesting question, particularly in the current market conditions. In Alita Resources Limited, in which we acted for Alita's deed administrators McGrath Nicol, it was necessary to consider whether orders made by the Court under section 444GA(1)(b) can go stale.
Alita, which was listed on the Singapore stock exchange, was a lithium miner, owning and operating the Bald Hill lithium mine in Western Australia. The deed administrators sought and obtained leave of the Court in September 2021 to transfer all shares held in Alita to the DOCA proponent, on the basis that the shares, at that time, had no value because the value broke in the senior debt. In granting leave, the Court accepted the independent expert evidence of the deed administrators and the DOCA proponent of the shares' (lack of) value. As the deed administrators proposed to transfer the shares to a foreign entity, the orders were subject to the approval both of ASIC and FIRB.
At the time of the hearing of the section 444GA(1)(b) application, the price of lithium (spodumene spot price) was approximately US$500 per tonne. However, it then took, in aggregate, the best part of two years for FIRB to consider and make its determination on the purported transfer, during which time the price of lithium increased substantially (high point of US$2,500 per tonne in 2023). The value of the underlying shares could now be higher than the secured debt, with the potential for unfair prejudice to shareholders, if the transfer were to occur now.
Ultimately, FIRB rejected the proposed transfer of the shares (and thus prevented completion of the underlying transaction contemplated under the DOCA), so there was no need to test the longevity of the section 444GA(1)(b) order. The DOCA was then terminated, and the liquidators entered into a different transaction with a different party, Mineral Resources, which did not require a section 444GA(1)(b) order or FIRB approval.
But what if FIRB had ultimately approved the purported transfer? Based on our dealings with ASIC, we think ASIC would have refused Chapter 6 relief without:
- a new or updated section 444GA(1)(b) order and/or;
- its satisfaction with an updated independent expert evidence opining on the effect of the increase on the lithium price on the value of the shares in the circumstances.
In other words, the existing section 444GA(1)(b) order would likely not have been sufficient to obtain ASIC Chapter 6 relief, because the Court's assessment of unfair prejudice would have been outdated.
With these matters in mind, it is worth considering the actual nature and effect of a section 444GA(1)(b) order in the current market.
The order itself does not transfer or give effect to any transfer of shares now or at any time. Instead, it merely represents the Court's view that the purported transfer does not unfairly prejudice the interests of the shareholders. Whether that purported share transfer actually occurs is a matter for the deed administrators and the proponent (or nominated recipient of those shares) but only after applying for a obtaining the necessary regulatory approval for that particular transfer. That being the case, the grant of leave is likely akin to the grant of an option, which needs to be exercised within a reasonable period of time and subject to regulatory requirements. If those requirements are not met, it will lapse and serve no purpose.
With that in mind, let's look at what you think about in an equity play as part of a restructure. It is worth considering the time it may take for regulatory approval for the purported transfer of shares in a HoldCo, particularly where there's volatility in the underlying value of the assets involved. A typical section 444GA(1)(b) process will take 4-6 months, with ASIC regulatory approval usually within three months thereafter. FIRB however can take one month or much longer and is much more unpredictable. It's also common for ASIC to await FIRB approval before making its determination.
One alternative is to consider the purchase of the downstream shares in the operating subsidiaries which may provide a faster and more efficient outcome. This however might not always be a realistic commercial option, as there are obvious advantages to acquiring the shares in the HoldCo, particularly where it is listed, and there are significant tax advantages to doing so. In any event, the Alita matter serves as a good illustration that if you intend to seek leave under section 444GA(1)(b) you should approach that process with expedition and with regard to the potential regulatory risk, and act promptly once leave of the Court is obtained.