29 July, 2012

In brief

• Panel finds no evidence to support challenge to foreign court injunction preventing Flinders Mines scheme proceeding.
• The decision is likely to prompt close attention to the drafting of "no legal restraint" conditions.

The facts in Flinders Mines Limited raised the interesting issue of whether a small shareholder should be able to block a deal by obtaining an injunction from a foreign court. The Takeovers Panel found no prima facie evidence to support the application, but hinted that target directors may wish to consider narrowing the drafting of "no legal restraint" conditions in future.

Ms Elena Egorova brought an action in the Arbitration Court of Chelyabinsk Region in the Russian Federation and successfully obtained an injunction restraining Magnitogorsk Iron and Steel Works OJSC (MMK) from proceeding with its proposed acquisition of Flinders Mines Limited under a scheme of arrangement. This breached the condition precedent in the Scheme Implementation Agreement between MMK and Flinders (SIA) that no injunction or order issued by any court of competent jurisdiction be in effect on the second court date. The SIA permitted either party to terminate the SIA if this condition had not been satisfied or waived by the Quit Date of 30 June 2012.

Ms Geraldine Carter applied to the Panel for a declaration of unacceptable circumstances, arguing that:

• Ms Egorova did not exist or it was very likely she did not exist. Therefore, it had not been established that the injunction had a proper legal basis; and
• Even if Ms Egorova was a real person, it was not in the public interest or conducive to takeover efficiency that a shareholder could block a mutually agreed and highly beneficial transaction between two parties.

There was evidence before the Panel supporting Ms Egorova's existence, and the Panel found that there was no prima facie basis to consider that Ms Egorova did not exist or that MMK and Ms Egorova were colluding.

The Panel sought further information to assist it in considering the applicant's second argument. The Panel noted that Flinders had submitted that an interim order extending the Quit Date would be prejudicial to Flinders' interests as a whole, given that the SIA exclusivity provisions would restrict Flinders seeking a third party proposal as an alternative to the scheme.

The Panel indicated that it was reluctant to interfere with contractual rights that had been negotiated at arm's length, disclosed and considered by the Court as part of the scheme process. The Panel noted that cases where it has changed contractual terms in the past have generally involved terms that have not been disclosed to the market.

The Panel also considered that there was no prima facie evidence that Flinders had not done enough to ensure the scheme proceeded.

The Panel concluded that there was no reasonable prospect it would make a declaration and accordingly declined to conduct proceedings. The Panel noted, however, that the relevant condition precedent in the scheme was drafted broadly, catching foreign injunctions that may not be recognised as appropriate in Australia. The Panel suggested that, in the light of this case, target company directors may wish to consider the drafting of these conditions very carefully in future. Following the Panel's decision, Flinders announced that the exclusivity period under the SIA had ended due to the Quit Date having passed. MMK then announced that it had decided to terminate the SIA.

Comment

The decision in Flinders Mines is likely to prompt close attention to the drafting of "no legal restraint" conditions. Target company directors will likely seek to narrow such conditions, for example, by excluding orders by foreign courts, unless made on the application of a regulatory authority. Target directors may also seek to require an Australian incorporated counterparty to the SIA, with an appropriate guarantee from its parent. Some acquirers may seek to resist these demands, for example, by arguing that the risk of an injunction being granted in their jurisdiction of incorporation is not significantly greater than in Australia, or by offering a reverse break fee. Ultimately, these issues will need to be resolved in the light of the terms as a whole and the relative bargaining power of the parties.

For further information, please contact:

Marie McDonald, Partner, Ashurst

[email protected]

Chin Yeoh, Ashurst 

[email protected]

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