Key points

• First occasion where a deed administrator has sought leave under section 444GA of the Corporations Act 2001 (Cth) (the Act) in respect of a publicly listed company. The Court granted leave for 98.2% of each shareholders’ holding in Mirabela Nickel Limited (Mirabela) to be transferred to certain unsecured creditors as part of a broader recapitalisation, under a deed of company arrangement (DOCA), without shareholder approval. 
• A robust valuation indicating where the value of the Company breaks is critical in convincing a Court that no unfair prejudice will result to shareholders from the transfer. 
• Section 444GA applications will provide an alternate, and likely quicker and cheaper, avenue to schemes of arrangement for creditors to pursue debt for equity transactions.
• First occasion a deed administrator has raised capital backed by a prospectus.
• Mirabela’s securities requoted on the ASX and all non-noteholder unsecured creditors (including employees) kept whole. 

Gilbert + Tobin acted for the deed administrators.

Background

Mirabela is an Australian listed company with a substantial mining asset and business in Brazil. During 2013, the Mirabela Group experienced a number of financial setbacks, including operational issues, declining nickel prices and, most significantly, the loss of a major customer representing approximately 50% of Mirabela’s nickel concentrate production. On 15 October 2013 Mirabela failed to make an interest payment due on the outstanding US$395 million unsecured notes (Unsecured Notes).

During the course of the following months, standstill arrangements were put in place with each of Mirabela’s major creditors (both in Australia and Brazil) and negotiations were undertaken with a group of holders representing approximately 65% of the Unsecured Notes (Ad-hoc Group). In February 2014 the Ad-hoc Group entered into a plan support agreement relating to a proposed restructure of the Mirabela Group, including a debt for equity swap at the head company level and also an issuance of convertible notes to raise capital. On 25 February 2014 the board of Mirabela appointed voluntary administrators.

On 13 May 2014 at the second meeting of Mirabela’s creditors a resolution was passed by a majority of creditors for Mirabela to enter into a DOCA to give effect to certain elements of the proposed restructure. One of the conditions for effectuation of the DOCA was that leave be granted pursuant to section 444GA of the Act to transfer approximately 98.2% of the shares in Mirabela to the holders of Unsecured Notes in exchange for the extinguishment and compromise of all the outstanding US$395 million principal plus interest owing to those holders.

On 16 June 2014 in the matter of Mirabela Nickel Limited (subject to deed of company arrangement) (ACN 1081 161 593) [2014] NSWSC 836, the Supreme Court of New South Wales granted leave under section 444GA of the Act for the deed administrators of Mirabela Nickel Limited (subject to deed of company arrangement) to transfer approximately 98.2% of the existing ordinary shares to certain of its unsecured creditors. This decision facilitated a capital reconstruction, preventing Mirabela from going into liquidation. 

The Power to Transfer

Section 444GA of the Act provides that a deed administrator may transfer shares in a company with consent of the owner of the shares or with leave of the Court. The Court can grant leave only if “it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.” This provision ensures that existing shareholders are afforded a level of protection and consideration, through the Court process, while allowing creditors, or others, to acquire the equity interests when it is fair to do so.

In Weaver v Noble Resources Ltd (2010) 41 WAR 301, the leading case on this section, Martin CJ concluded that the notion of unfairness only arises if prejudice is established. He further observed that, in situations where the company has no residual value to the members, “it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair.”

In considering ‘unfair prejudice’, a comparison between the position of the affected party under the proposed transfer and their position under a winding up is paramount. In Lewis, in the matter of Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 53, White J highlighted that, in making this assessment, it was key to consider the value of the shares as they currently exist, any potential value they may have in the future, and what it would take to attain that potential value. Ultimately, is a question of where the value in the company resides. 

Engagement with shareholders

While there is no formal requirement in the Act for providing notice of the application to shareholders, the deed administrators provided the then existing shareholders with an explanatory statement (including an independent expert report focusing on valuation) so that all shareholders had notice of the application, the substance of the deed administrator’s proposal, and the steps they could take to appear at the hearing. This explanatory statement outlined the transaction, valuations of the company in an alternative scenario (liquidation) and the consequences for shareholders of the application being granted. Mirabela received some correspondence from shareholders following release of the explanatory statement. However no objectors appeared at the Court hearing. 

The Mirabela Decision

As Mirabela had over 3,500 shareholders, it was obviously not feasible to obtain consent from such a large shareholder base and so the deed administrators applied to the court for leave under section 444GA of the Act; the first time such an application has been made in respect of a listed company. As noted the key elements to obtaining leave is the need to show that no unfair prejudice would result to shareholders from the transfer.

The Court was ultimately satisfied by the evidence presented to it, and in particular that the value in Mirabela resided with the creditors, not the shareholders (i.e. the shares of Mirabela had no value). As noted in Weaver if the shares have no value then there can be no prejudice to shareholders.

The successful application for leave to transfer shares was an important condition in the recapitalisation of Mirabela. The recapitalisation also involved the extinguishment of Mirabela’s secured interim financing, the issuance of convertible notes to raise required capital and the maintenance of all other unsecured creditors (including employees).

Gilbert + Tobin acted for the Ad-hoc Group of noteholders through the recapitalisation process.

Engagement with Regulators

As part of the proposed restructure the deed administrators engaged with both the Australian Securities Exchange (ASX) and the Australian Securities and Investments Commission (ASIC) to obtain certain relief in lieu of seeking shareholder approval.

Give the structure of the transaction the following was required:  

• exemption from the requirements of section 606 of the Act in connection with the transfer of shares in Mirabela to the holders of Unsecured Notes (i.e. the debt for equity swap), the issuance of fee shares to certain creditors and any conversion of secured convertible notes into ordinary shares; and 
• a waiver of ASX Listing Rule 7.1 to facilitate the issuance of secured convertible notes (and the potential conversion to ordinary shares). 

After significant engagement, both ASIC and ASX granted the required regulatory relief, conditional upon explanatory materials being made available to shareholders and the Court granting leave in relation to the share transfers.

Impact of the Recapitalisation

The Court decision paves the way for creditors to pursue debt for equity transactions without shareholder approval nor the need for the 75% in value threshold to be met for each class of creditors that a creditors scheme involves.

More generally the Mirabela recapitalisation paves the way for ASX companies not to be unnecessarily fearful of using administration as a step in a recapitalisation process. The Mirabela business operated normally through the administration process, trade creditors were kept whole and employees kept their jobs.

Mirabela demonstrated that the Courts, ASX and ASIC will work with listed companies to provide the appropriate relief to effect debt for equity swaps, to maintain a listing and, indeed, allow for capital raising to be effected after a company has gone into administration.