TGIF 9 September 2022 – Nothing to investigate in board’s nimble refinancing with new investors

This week’s TGIF considers the decision in Enares Pty Limited v Nimble Money Limited  [2022] FCAFC 126, in which the Full Court considered shareholder information rights in the context of a dispute between Nimble’s board and its largest shareholder as to how to refinance Nimble’s debt.

Key takeaways

• For boards of companies experiencing financial distress, decisions affecting the capital structure need to be carefully documented and communicated to investors.
  
  
• For investors, maintaining good communication and information flow from the board is crucial. Current laws give ample scope for incoming investors to lock in board support confidentially, with high hurdles for shareholder access to information. Having a nominee director or holding secured debt can help (preferably with contractual information rights) but will not necessarily stop a board-supported proposal.
  
  
• Any party wanting their proposal taken seriously should not leave it too late, avoid gaps between withdrawing one indicative proposal and making a new one and, if feasible, consider putting it in the form of a binding but ‘conditional’ offer (rather than an indicative non-binding proposal not capable of acceptance).

What happened?

Nimble Money Limited (Nimble) is a public company but not listed on the ASX.   Enares Pty Ltd (Enares) held about 15% of Nimble’s shares, being its largest shareholder. Van Diemens Land Finance Pty Ltd (VDLF) held about 14%, with the balance spread between about 70 other shareholders.

Nimble became financially distressed last year in attempting to move its business from short-term money lending to medium to long-term lending during the pandemic.  

Senior and subordinated debt was repayable in December 2021. The subordinated debt comprised notes at 16% p.a. interest.  Enares held about 75% of the notes, with the rest held by VDLF via a related entity.  The notes had been intended as short-term emergency finance, which Enares had intended to be repaid via a rights issue.

By October 2021, the whole board had retired or been removed except for VDLF’s nominee director, Mr Edney.

Refinancing vs recapitalisation

Mr Edney asked the noteholders if they would take new notes to refinance the existing ones. Enares instead proposed a recapitalisation where it would underwrite a $10 million rights issue (October Proposal).  

Nimble’s lawyers stated that no important decisions would be taken before appointing new directors and that it would make sense to meet and discuss the recapitalisation proposal once the new board was in place before making any decision.

By late October, Mr Edney had found three new potential directors and Enares had withdrawn its October Proposal.

Mr Edney was still open to recapitalisation. Nimble’s lawyers said no action on the recapitalisation would be taken until the three new directors were appointed. But once appointed, they would decide and then inform key shareholders – suggesting that a decision had to be made urgently before further consultation.

The following day, the new board announced to shareholders that it had received a non-binding term sheet from the senior lenders to re-finance Nimble’s existing senior facility on the condition that Nimble raise $4.5 million in equity or subordinated notes to replace the existing subordinated debt.  

Nimble stated it was considering various options, seeking expressions of interest from key shareholders and new investors. The Full Court found this was not a representation that the board would consult further with Enares.

New board locks in refinancing with new investors

After a couple of weeks, the board announced a ‘binding agreement with a new investor group’ for $4.5 million of secured subordinated notes in different series at interest rates ranging from 10 up to 24% p.a. over a three-year term (Refinancing). The Refinancing was conditional on due diligence, documentation and a ‘follow-on offer’ to shareholders to raise another $2 million to $4 million.

Enares’ lawyers immediately complained:

• that the Refinancing was contrary to the interests of shareholders as a whole, introducing significant further debt at ‘extraordinarily high’ interest;
  
  
• that the board had not sought to investigate, consider and propose a preferable equity raising via existing shareholders;
  
  
• that Nimble knew Enares was prepared to participate in an equity raising, had the funds necessary and was supportive of it being open to all shareholders equally;
  
  
• that the Refinancing required shareholder approval; and
  
  
• that Nimble was obliged to provide documentation.

Enares made a further indicative offer for an equity raising, subject to due diligence and documentation (November Proposal). Nimble’s board informed shareholders about it the following week.

A week later, Nimble executed documentation for the Refinancing. The board had in effect declined the November Proposal.

Primary judge refuses orders to inspect books

Enares applied to the Federal Court under section 247A of the Corporations Act 2001 (Cth) (Act) for orders to inspect Nimble’s books.

Enares claimed this was to ascertain whether to pursue claims against Nimble’s directors or an oppression claim. Enares also wanted to protect its investment because its proportionate shareholding could be diluted even if it participated in the ‘follow on’ offering.

Enares asserted:

• that Mr Edney would have passed information to VDLF that was not available to Enares;
  
  
• that the ‘unidentified new investors’ would have been associated with VDLF or the new directors, who would not have had time to consider the refinancing options for themselves; and
  
  
• that it remained prepared to underwrite an equity rights issue to protect its investment, despite the board refusing to meet.

The primary judge dismissed Ensares’ application, finding that:

• Enares’ concerns had no objective foundation. They were no more than bare suspicions with “an air of commercial unreality”;
  
  
• the Refinancing would reduce the overall debt burden (this was contested unsuccessfully on appeal);
  
  
• there was nothing to suggest information asymmetry outside Nimble’s established protocol for nominee directors (in any case, Mr Edney did not give evidence); and
  
  
• Nimble was entitled to keep the new investors’ identity confidential.

Enares appeals to Full Court

Enares appealed on several grounds. The case turned on the first ground – whether there was an ‘issue to investigate’ in relation to a potential derivative suit under section 237 of the Act for breach of duties or oppression suit under section 232 of the Act. The Full Court found there was no issue to investigate.   

As a result, it did not matter that Enares had some success in arguing that that the primary judge may have erred in:

• attributing to the board some rationales for rejecting the November Proposal that were not based on evidence;
  
  
• attributing to Enares an alternative improper purpose; and
  
  
• finding that November Proposal had been withdrawn (when only the October Proposal had been withdrawn).

The Full Court found there was no issue to investigate and accordingly the hurdles for enlivening the Court’s discretion under section 247A were not met.  

Hurdles for accessing information using section 247A

The Full Court described the structure of section 247A as awkward but, despite its drafting, clear in giving a court discretion to make orders once satisfied that the applicant is “acting in good faith and that the inspection is to be made for a proper purpose”.  

The Full Court analysed this in two parts as follows.

Was the asserted purpose legitimate?

The first part was whether Enares’ asserted purpose was a legitimate purpose, given the nature of the statutory relationship between shareholder, company and directors.

The Full Court explained that the asserted purpose must relate to the shareholder’s rights qua shareholder, in relation to the company or its directors. Also, so long as a proper purpose is the dominant or primary purpose, any collateral or incidental benefits are irrelevant.

Enares’ asserted purpose in ascertaining whether there was a breach of directors’ duty or oppressive conduct, and protection of a shareholder’s investment, would all fall within the scope of a ‘proper purpose’.  

But shareholders do not ordinarily have access to the courts to challenge managerial decisions, so ‘mere dissatisfaction’ with decisions is not enough. The Full Court found that Enares’ concerns did not rise higher than ‘mere dissatisfaction’ with a management decision.

Was the application for the asserted purpose?

The second part was whether Enares had established that it actually had that ‘asserted purpose’ in making the application. That is, was it made in good faith?

The Full Court explained that for there to be good faith there must at least have been a reasonable basis or foundation for the asserted purpose. It is not enough to be unsure whether the directors have complied with their duties and merely want to ascertain if a breach has occurred.

The Full Court noted that the new directors were “extremely well qualified and experienced, as was Mr Edney” and that the board was “apparently satisfied” that none of them had any relevant relationship with the incoming confidential investors. There was nothing to suggest any impropriety.

Enares’ concern was, at its heart, that given Nimble’s financial distress it should have raised funds by a rights issue rather than refinancing existing debt. At best it was asserted at a high level of generality that Nimble’s financial position was so distressed that the debt refinancing strategy could lead it into insolvency.

But the Full Court found that the board had no real choice other than to refinance by a new notes issue, noting that:

• Enares’ equity offer was indicative and conditional;
  
  
• there had been two recent failed attempts to raise equity capital;
  
  
• urgent action was called for as Nimble’s negotiating position would weaken as the senior debt maturity approached;
  
  
• the refinancing would reduce the overall debt burden and/or Nimble would be able to service the overall debt;
  
  
• the refinancing would maintain the status quo allowing Nimble to trade out and take advantage of an improved financial position; and
  
  
• the refinancing would maintain the value of Nimble’s shares compared with Enares’ proposal.

This left no foundation for Enares’ concerns and no discretion to order inspection.

Comment

The case is a reminder of how access to information is critical part of any restructuring – not just for the purposes of due diligence to remove conditionality but also in getting visibility on deals done with the company’s officers.

Any party wanting their proposal to be accepted needs to keep an open line of communication with the board, not leave the proposal too late, be careful not to leave gaps in time between proposals, and preferably get to a conditional rather than indicative non-binding offer. In this case the Refinancing agreement was also conditional on due diligence and other matters.