No more broken toys: DOCA flexibility powers Toys “R” Us restructure

The Federal Court of Australia recently reaffirmed the flexibility of the Deed of Company Arrangement (DOCA) regime under the Corporations Act 2001 (Cth) (the Act).[1]

It is well established that a DOCA can be used to transfer shares with approval under s 444GA of the Act. In a decision which the Federal Court described as not another vanilla s 444GA application, the Court was asked to consider whether a DOCA could transfer other forms of equity participation.

For the first time, the Court confirmed that deed administrators implementing a DOCA involving a change of control process can now transfer not only shares, but also share options, warrants and other analogous instruments which are contingently convertible into shares (collectively described in this article as Equity Rights). The decision demonstrates the Court’s pragmatic willingness to support commercial outcomes which benefit creditors where no unfair prejudice is suffered by members or holders of other forms of equity.

Background

Toys “R” Us ANZ Limited (Company) and its wholly owned subsidiaries entered voluntary administration on 4 June 2025. Following the administrators’ appointment, an urgent sale process was launched, culminating in the administrators’ acceptance of a DOCA proposal which involved the transfer of all of the issued shares in the Company to a special purpose acquisition vehicle related to Directed Electronics Australia Pty Ltd (Transferee).

In recommending the proposed DOCA, the administrators assessed that unsecured creditors would receive no return in the event of liquidation but could expect between 1 to 6.5 cents to the dollar under the proposed DOCA. In both cases, shareholders would receive no return.

The difficulty which prompted the deed administrators’ application to the Court was that the DOCA (which was executed on 31 July 2025) contemplated the transfer and subsequent cancellation of all Equity Rights, including share options or analogous instruments held by 19 separate parties, including employees, current and former executives and other significant holdings. This gave rise to the question of how to legally give effect to a transfer or cancellation of the Equity Rights, in respect of which the Court identified the following four possible solutions:

• Option 1: Treating Equity Rights holders as creditors under the DOCA with claims against the Company via their contractual rights that would be extinguished in return for a right to participate in distribution from a creditors’ trust fund.
• Option 2: Insofar that the DOCA did not specifically provide for Option 1, vary the DOCA either by a creditors’ resolution or an order under s 447A of the Act to achieve the same result.
• Option 3 (preferred by the Court): Using s 447A to modify the operation of s 444GA to deal with the Equity Rights by way of transfer and then either the exercise or non-exercise of those rights by the Transferee.
• Option 4: Effect the transfer of Equity Rights by provisions in the DOCA, an option described by the Court as unrealistic because any share transfer would require a s 444GA order.

Leave under s 447A to modify s 444GA

The Court accepted and confirmed the broad nature of s 447A to permit modification of s 444GA such that the provision’s reference to ’shares‘ could be taken to include the Equity Rights. The Court also concluded that the transfer of the Equity Rights would serve the same purpose as the share transfer required by the DOCA, namely, meeting the Transferee’s commercial imperative for control of the Company via ownership of its issued share capital.

Having accepted that position, the Court considered the application of s 444GA in accordance with accepted principles; that is, the extent to which there was any prejudice to the Equity Rights holders. The Court was satisfied that the interests of Equity Rights holders had no residual value and those parties had been adequately informed of that position. The evidence considered by the Court included an independent valuation of the residual equity obtained by the deed administrators which was consistent with ASIC Regulatory Guide 111. The Court concluded that like the Company’s shareholders, the Equity Rights holders would not be unfairly prejudiced by the transfer of those rights to the Transferee. In particular, if the Company was wound up (being the only alternative to effectuation of the DOCA), there would be no market for the Equity Rights, which would not be capable of exercise and/or would have nil value.

Direct v Indirect use of s 447A to deal with Equity Rights

The Court provided further guidance to the operation of s 447A, outlining two valid approaches to deal with Equity Rights under a DOCA:

1. Indirect approach: Reliance on s 447A to modify the DOCA by treating Equity Rights holders as creditors and extinguishing their claims.
2. Direct approach: Reliance on s 447A to modify the operation of s 444GA to expand its scope to include Equity Rights.

The Court confirmed that both pathways are appropriate but expressed a preference for the indirect approach, particularly given the fact that there were employees of the deed companies who were creditors. The Court noted that in any event, the DOCA’s express terms appeared to take the indirect pathway summarised above, but that if this had not been the case, s 447A could have been used to modify the DOCA to achieve such an outcome.

ASIC relief

The Court also noted that ASIC relief was still required to ensure compliance with takeover thresholds under Chapter 6 of the Act. Relevantly, ASIC had confirmed that relief would be granted provided that the Court granted the relief sought from the Court by the deed administrators.

Key takeaways:

• This decision is the first instance of a superior Australian court confirming that s 447A of the Act can be used to modify s 444GA in allowing deed administrators to transfer not only shares but also Equity Rights under a DOCA.
• Accordingly, the Federal Court’s decision creates significant impetus for an expanded uptake of DOCA-led change of control transactions, in particular, by private equity or private credit stakeholders seeking greater control of the recapitalised enterprise. It is expected that such a trend is likely to be more prevalent in industry sectors featuring the widespread use of convertible notes, convertible bonds, preference shares and other types of “hybrid” instruments to quickly raise working capital without immediately diluting equity. Prominent examples here are likely to include ESG-affected capital-intensive industries such as oil and gas, which require significant upfront investments for development and exploration programmes and whose funding options are becoming more limited and complex.
• Correspondingly, the decision provides clear guidance to deed administrators implementing DOCA-led change of control restructures, including:
  • the utility of obtaining carefully calibrated orders under s 447A to procure expanded operation of s 444GA required to effectuate all contemplated dealings with Equity Rights
  • the need to obtain cogent independent evidence as to valuation of the various Equity Rights so as to satisfy the Court of the absence of unfair prejudice to holders of those Equity Rights
  • the importance of early and ongoing engagement with ASIC (in particular for the purpose of obtaining any required relief from operation of the takeover provisions in Chapter 6 of the Act).

Our team of Restructuring & Insolvency experts at Gadens can assist if you require further guidance.

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Authored by:

Pravin Aathreya, Partner
William Doble, Associate
Phillip Danh, Graduate

[1] In the matter of Toys “R” Us ANZ Limited (subject to deed of company arrangement) [2025] FCA 1135.