While the M&A pipeline remains strong and the usual acquisition models for listed companies (takeovers and schemes of arrangement) remain active, as talk turns to economic headwinds and rising interest rates, it is worth bearing in mind the third possible pathway to acquire a listed company in a distressed context: the “DOCA takeover”.
- Deed of company arrangement (DOCA) takeovers are an alternative to takeovers and schemes of arrangement for listed company acquisitions in a distressed context, and allow the acquisition of shares (where equity value is essentially wiped out) without requiring the approval of shareholders.
- There are some key differences between the DOCA takeover and scheme of arrangement processes – including that a DOCA takeover of a listed company requires a lower creditor approval threshold, but also specific ASIC relief from the takeovers provisions of the Corporations Act.
WHEN CAN A DOCA TAKEOVER BE USED?
DOCA takeovers have been used for acquisitions of listed companies by a single acquirer (for example, Seven Group Holdings’ acquisition of Nexus Energy, CBS’s acquisition of Ten Network Holdings and Bain Capital’s acquisition of Virgin Australia) and for creditors to take a majority interest in, and restructure, a listed company in a manner which would otherwise be inconsistent with the takeovers rules (for example, the restructures of Mirabela Nickel and Paladin Energy).
The DOCA takeover is an acquisition using a deed of company arrangement under section 444GA of the Corporations Act. It applies where:
- a company is insolvent and under administration;
- a proposal is put to the administrator by a “bidder” – who may be an existing shareholder or creditor – to acquire shares in the company;
- creditors will get a better return than they would get on a liquidation; and
- shareholders are not “unfairly prejudiced” by implementation of the proposal.
WHO GETS A SAY?
Creditors get to vote on the proposed DOCA (which will include the proposed transfer of shares). However, in features that can feel novel for those used to schemes of arrangement:
- in a DOCA, there is no class voting regime and so creditors with disparate interests will vote as a single group, in a way that they would not in a classic scheme of arrangement;
- the voting threshold is 50% (that is, a simple majority), not 75%;
- the creditors’ vote is done on two bases – value of debt and a creditor headcount test. If there is a deadlock where, say, the headcount test passes but the value of debt vote fails, the administrator has a casting vote. This can have results which, again, may be unexpected for someone used to classic takeovers/schemes of arrangement. For example, there may be a large number of employees who get to vote together with financial creditors and may outvote them on the headcount test, despite holding only a small proportion of the company’s debt by value. If that happens, but the administrator considers the DOCA takeover would be the best outcome for the company having regard to the interests of creditors as a whole, the administrator can use its casting vote so the DOCA takeover proceeds; and
- a DOCA cannot bind secured creditors who do not vote in favour of it (unlike a creditors’ scheme of arrangement, which can bind “dissenting” secured creditors who are expressed to be party to the scheme). This can give secured creditors an effective “veto” right over the DOCA takeover, if (as will often be the case) it practically depends on a compromise being effected between the company and those secured creditors.
Shareholders typically get:
- no vote; and
- no consideration,
and the administrator is able to obtain a court order to transfer their shares to the bidder without the shareholders’ consent. While the lack of a shareholder say or return may seem stark, the policy basis for this is that, as all equity or shareholder value has been lost, creditors themselves will be taking a haircut and the residual value of the company should be used to benefit creditors rather than shareholders.
WHAT SHAREHOLDER PROTECTIONS DO APPLY?
There are three key checks and balances on the ability to use a DOCA to transfer shares without shareholders having a vote or receiving value:
- First, the Court must be satisfied that the transfer of shares would not “unfairly prejudice” shareholders. Shareholders have the ability to test this by opposing a proposed Court order to transfer their shares. It will generally be found that there is no unfair prejudice as long as the company is insolvent and shareholders would not have received any return on an insolvent liquidation. If the company is insolvent for cash flow reasons but has positive net asset value, for example, shareholders would expect a return on an insolvent liquidation, so a DOCA takeover is unlikely to work in that context.
- Second, an acquisition of shares through a DOCA takeover, unlike a takeover or scheme of arrangement, is not exempt from the ‘20% stop rule’ in the takeovers provisions of the Corporations Act. Specific ASIC relief is therefore required. However, ASIC will grant that relief, subject to some key requirements being met:
- an independent expert’s report (IER) concludes that there is no residual value equity value;
- shareholders are sent (before the Court hearing) an explanatory statement which includes the IER and explains their right to object to the DOCA takeover (by opposing the Court application for the share transfer); and
- the Court concludes that there is no unfair prejudice to shareholders.
- Third, while the Court may consider a report from the administrator to be sufficient, as noted above, ASIC policy requires a takeovers-style IER. Importantly, however, after previously insisting that this report must consider value on a “going concern” basis as well as a “liquidation” scenario, since October 2020, ASIC has accepted that it can be prepared on a “winding up” or ‘liquidation” basis (where that is the likely consequence of the DOCA takeover not proceeding).
Where the requirements for the required ASIC relief and Court order – which all centre around all shareholder value being lost – can be met, the DOCA takeover can be a realistic path to acquiring control of a distressed listed company.