Brazen v Bell Atlantic Corp 695 A2d 43

General 9 I discussed break fees and other "deal protection" measures, notably "no shop" or exclusivity period provisions, in Re APN News & Media Ltd (2007) 62 ACSR 400 (APN) at [25]-[55] and to a lesser extent in Re Investa Properties Ltd (2007) 25 ACLC 1186 at [31]-[35], and will not repeat what I said in those cases. Generally, a break fee is a fee payable by the target company to the acquiring company in certain circumstances in which the acquisition is not implemented. Such provisions form part of a merger implementation agreement to which the directors of the target company commit their company prior to a scheme of arrangement being considered by the target company's shareholders. When deciding whether to order that a meeting be convened or that a scheme be approved, the Court is not in a position to decide whether a merger implementation agreement was entered into in breach of the duties owed by the target company's directors. The Court could do so only on a contested hearing in which it is alleged, and sought to be proved, that by committing the target company to the merger implementation agreement, the directors breached their statutory and general law duties: see eg, Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832. 10 In what circumstances should the Court decline to order that a scheme meeting be convened, that is to say, deny the shareholders of the target company the opportunity of considering a scheme under s 411 of the Act recommended by their company's directors, and deny the acquiring company the possibility provided by that section of having all of the target's shareholders bound? 11 In Brazen v Bell Atlantic Corp 695 A2d 43 (Del Supr 1997) (Brazen v Bell) the Supreme Court of Delaware made (at 49-50) the following observations that are pertinent to this question (the case concerned a stock for stock merger of equals, with reciprocal identical break fees): Plaintiff further argues that the termination fee provision was coercive. Plaintiff contends that (a) the stockholders never had an option to consider the merger agreement without the fee, and (b) regardless of what the stockholders thought of the merits of the transaction, the stockholders knew that if they voted against the transaction, they might well be imposing a $550 million penalty on their company. Plaintiff contends that the termination fee was so enormous that it "influenced" the vote. Finally, plaintiff argues that the fee provision was meant to be coercive because the drafters deliberately crafted the termination fees to make them applicable when Bell Atlantic's stockholders decline to approve the transaction as opposed to a termination resulting from causes other than the non-approval of the Bell Atlantic stockholders. We find plaintiff's arguments unpersuasive. First, the Court of Chancery properly found that the termination fee was not egregiously large. Second, the mere fact that the stockholders knew that voting to disapprove the merger may result in activation of the termination fee does not by itself constitute stockholder coercion. Third, we find no authority to support plaintiff's proposition that a fee is coercive because it can be triggered upon stockholder disapproval of the merger agreement, but not upon the occurrence of other events resulting in termination of the agreement. In Williams v Geier, this Court enunciated the test for stockholder coercion. Wrongful coercion that nullifies a stockholder vote may exist "where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction [Williams v Geier 671 A.2d 1368 (Del Supr 1996), 1382-83]. But we also stated in Williams v Geier that "[i]n the final analysis ... the determination of whether a particular stockholder vote has been robbed of its effectiveness by impermissible coercion depends on the facts of the case" [Id at 1383]. 12 In my opinion, it will be appropriate for the court to decline to order that a scheme meeting be convened, or that a scheme be approved, if the court is satisfied that a naked no vote break fee is so large as to be likely to coerce the shareholders into agreeing to the scheme, rather than assessing the offer on its merits. However, the court should not readily find that the target company's directors have committed the company to an arrangement that will have the impermissible coercive effect on the company's shareholders, and nor should the court seek to substitute its view of the best interests of the company for that of the directors.

Australian analogues 13 Two decisions of the Takeovers Panel are relevant. In Re Ausdoc Group Ltd (2002) 42 ACSR 629 a break fee was payable, inter alia, where a 90 percent minimum acceptance condition of a takeover offer was not satisfied. The Panel found the break fee provision to be unacceptable and accepted undertakings by the bidder and the target company not to enforce the provision or to pay the fee, respectively. The Panel stated (at [44]) that: "In assessing the potential for the 90% break fee to influence the decision of Ausdoc shareholders, we had regard to the fact that … [t]he 90% break fee represents approximately 42% of [that year's] expected profit figure". The Panel had regard to the fact that payment of the break fee would mean that shareholders would not be paid a dividend for the year. The Panel accepted ASIC's submission that the break fee provision was coercive, that naked no vote break fees are to be distinguished from others, and that in the particular circumstances of the case, only a de minimis naked no vote break fee could be supported. 14 In Re National Can Industries (No 1) (2003) 48 ACSR 409 the Panel stated (at [42]) that it did "not entirely reject the notion that a fee should be payable if and when a proposal the directors have endorsed is rejected by shareholders", and that "[a]s GN7 put it, such a fee may be an appropriate price to secure an opportunity broadly in the nature of an option" [the reference to GN7 is a reference to the Panel's Guidance Note No 7: Lock-up Devices]. Later, at [51], the Panel again referred to the naked no vote break fee as "in effect the price paid to secure the opportunity for shareholders to consider the proposal". The review Panel (at [33]) expressly agreed with the former statement by the original Panel. 15 For the purposes of assessing a particular break fee, I see no distinction between the 90 percent minimum acceptance condition in Re Ausdoc Group Ltd 42 ACSR 629 and the minimum voting percentages referred to in s 411(4)(a)(ii) of the Act. The approach taken by the Panel in Re Ausdoc Group Ltd 42 ACSR 629 may have been influenced by the size of the break fee in question. Be this as it may, the view expressed in Re National Can Industries (No 1) is inconsistent with any notion that a naked no vote break fee can only be supported if it is de minimis.

Overseas comparisons 16 The United Kingdom, like Australia, has legislative provision for judicial approval of schemes of arrangement: Companies Act 2006 (UK) c 46, Pt 26 (ss 895-901). There, as here, there is also a specialist takeover panel (the Panel on Takeovers and Mergers) and an associated administrative document containing guidance as to an acceptable level of break fee in the context of takeovers: The City Code on Takeovers and Mergers (8th ed, Panel on Takeovers and Mergers, 2006)and the Panel's Practice Statement No 4, r 21.2 regarding inducement fees, the effect of which I summarised in APN 62 ACSR 400 at [46]. 17 The researches of Bolnisi's counsel did not elicit anything of specific relevance to naked no vote break fee provisions from the United Kingdom. 18 In New Zealand, Part XV of the Companies Act 1993 (NZ) (ss 235-239) also provides for judicial approval of schemes of arrangement. However, solicitors for Bolnisi informed the Court that Bolnisi's New Zealand counsel advised that the Takeovers Panel in New Zealand had not had to consider the issue of naked no vote break fees, or break fees more generally. 19 In the United States (US), there is no régime comparable to that of the United Kingdom or Australia. In the US questions of the legitimacy of break fees arise in litigated contests, notably in the Delaware Court of Chancery and, on appeal from it, the Supreme Court of Delaware. Consequently, break fees have been considered in Delaware in the factually rich matrix of (often disputed) evidence. In those cases, the plaintiff is often a competing bidder or an aggrieved stockholder who assumes the task of proving a breach of the target company's directors' fiduciary duty to obtain the highest price for the target's shareholders, and not to allow any conflict of interest or other factor to interfere with their doing so, as recognised in Revlon Inc v MacAndrews & Forbes Holdings Inc 506 A2d 173 (Del Supr 1986). 20 This is a very different situation from that which prevails in applications under s 411 of the Act, even after allowance is made for performance of the plaintiff's duty to draw the Australian Court's attention to matters that might point against approval. 21 The Delaware cases have recognised the tension that potentially exists between "the business judgment rule" and the fiduciary duty of the directors. The business judgment rule cautions against the courts' substituting their opinion as to where the commercial interests of the corporation and its shareholders lie for the opinion of the directors. 22 So called "break fees" have worn different names, particularly in the US ("termination fees", "inducement fees", "cancellation fees"). The amount payable sometimes varies according to the circumstances in which it becomes payable, the amount being less in the naked no vote situation. For example, In re Toys "R" Us Inc Shareholder Litigation 877 A2d 975 (Del Ch 2005) (Toys "R" Us), the break fee in one offer was described as follows (at 996): The Company offered to pay the KKR Group [the acquiring company] 3% of the Company's equity value, as implied by the final deal terms. The payment of the 3% was, from what I can discern, to be made only when: 1. the Company's board terminates the merger agreement to accept a higher bid or the KKR Group terminates because the board had withdrawn its recommendation of the merger; 2. another offer to acquire the Company exists at the time the Company's stockholders vote on the merger, the Company's stockholders do not approve the merger agreement, and the Company consummates an alternative transaction within the next year; or 3. another offer to acquire the Company exists at the time the merger agreement terminates automatically by having reached its termination date, September 15, 2005, and the Company consummates an alternative transaction within a year. In the event that the merger agreement was terminated simply because the Company's stockholders voted it down, the Company offered only to reimburse the KKR Group for a to-be-negotiated sum approximating its documented, out-of-pocket expenses. 23 In Toys "R" Us, the target company "agreed to pay only up to US$30 million in documented expenses", less than half of a percent of the equity value of the company, upon the occurrence of a naked no vote (at 997). On the other hand, a full termination fee "payable for the most part only if the company terminated the merger agreement in order to sign up another acquisition proposal within a year" was US$247.5 million (3.75 percent of equity value and 3.25 percent of enterprise value) (at 997). Although the Court did not scrutinize the naked no vote fee in its opinion, it did observe (at 1023): [T]he bottom line is that the public stockholders will have an opportunity tomorrow to reject the merger if they do not think the price is high enough in light of the Company's stand-alone value and other options. If the stockholders vote no, the only price will be the payment of $30 million to KKR Group, which is likely less than its actual expenses to date. 24 It seems to follow that in Toys "R" Us the Court did not view the naked no vote break fee provision with disapproval. 25 In 2007, a Project Report of the Mergers & Acquisitions Market Trends Subcommittee of the Committee on Negotiated Acquisitions of the American Bar Association's Section of Business Law was released, entitled "2007 Strategic Buyer/Public Target Mergers & Acquisitions Deal Points Study". The study relates to transactions and acquisitions announced in 2005 and 2006. It found that nine percent of 2005 and 2006 acquisitions involved naked no vote break fees. The report also found that out of the 18 transactions that contained a naked no vote trigger, 17 required reimbursement of expenses only (as was the case in Toys "R" Us, for example), rather than the higher break fee payable in other contexts. 26 I referred at [11] above to Brazen v Bell in which a nearly naked no vote break fee was upheld by the Supreme Court of Delaware. The fee was US$200 million (less than one percent of the corporation's market capitalisation). I say "nearly", because another condition was that there must have been in existence a competing proposal, even though it was rejected or withdrawn. If the competing proposal came to fruition within one and a half years, however, an additional US$350 million was payable (the total of US$550 million was approximately 2 percent of the target's approximately US$28 billion market capitalisation). 27 A complicating factor was that the Supreme Court of Delaware tested the fee against a liquidated damages measure rather than the business judgment rule, because the agreement's provision had the effect of specifically requiring the application of that measure. The Supreme Court of Delaware held the fee of US$550 million to be in the nature of liquidated damages, not a penalty, because it was "within the range of reasonableness" (at 49). 28 In several cases, the Delaware Court of Chancery has made passing reference to naked no vote break fees without suggesting disapproval: see Emerson Radio Corp v International Jensen Inc 1996 WL 483086 (Del Ch 1996) at 9; Hills Stores Co v Bozic 769 A2d 88 (Del Ch 2000) at 104; and McMillan v Intercargo Corp 768 A2d 492 (Del Ch 2000) at 505. In HF Ahmanson & Co v Great Western Financial Corp CA 15650 (Del Ch 1997) that Court upheld a 3 percent break fee notwithstanding that half of that break fee remained payable in the naked no vote situation. In Paramount Communications Inc v QVC Network Inc 637 A2d 34 (Del Supr 1993) a US$100 million break fee was payable, inter alia, in the naked no vote situation. However, the Supreme Court of Delaware held that, in the circumstances of that case, the break fee and the other lock-up arrangements were unreasonable and "draconian", and affirmed the decision of the Court of Chancery that the company's directors had breached their fiduciary duties. 29 The result of the Delaware cases is that naked no vote break fee provisions have not been treated as ipso facto insupportable. They are not regarded as per se bad, but rather are to be considered in the particular circumstances of each case. 30 As in the US, judicial consideration of break fees by Canadian courts often occurs in the context of contested litigation. Canadian courts have upheld break fees generally: see CW Shareholdings Inc v WIC Western International Communications Ltd (1998) 38 BLR (2d) 196. I was informed that counsel for Bolnisi's Canadian subsidiary company, Palmarejo, conducted a survey of plans of arrangement undertaken in Canada in 2007 and found that many included a naked no vote break fee.

The evidence before the Court relevant to the naked no vote break fee in the present case 31 Bolnisi relies on the following three affidavits. The first is an affidavit of Norman Alfred Seckold, Chairman and a Director of Bolnisi, sworn 25 October 2007, paras 22-27 of which were set out in my earlier reasons for judgment (at [25]) and are summarised at [39] below. 32 The second affidavit is a further affidavit of Mr Seckold sworn 13 November 2007 in which Mr Seckold states that the terms of the MIA were negotiated at meetings on 4 April 2007 and 2 May 2007, and that at one of those meetings a partner from Freehills, representing Coeur, told him that Coeur would not enter into a transaction with Bolnisi unless Bolnisi agreed to pay a break fee triggered by a failure of its shareholders to vote to agree to the proposed Scheme. Mr Seckold stated that he agreed subject, inter alia, to Coeur's agreeing to a reciprocal break fee provision, because without it, it would be open to Coeur shareholders to frustrate implementation of the Scheme by not passing the resolution to increase the number of the authorised shares in the capital of Coeur. Mr Seckold states that he took the view that without the provision for the Coeur break fee, the Coeur shareholders would have "a free option over the scheme". 33 The third affidavit is that of Mitchell John Krebs, Senior Vice President - Corporate Development at Coeur, sworn 15 November 2007. Mr Krebs's affidavit dealt with two topics: first, quantification of the losses that Coeur would sustain if Bolnisi shareholders did not agree to the Scheme, and, second, Coeur's negotiating position vis-a-vis Bolnisi. 34 In relation to the former, Mr Krebs's affidavit shows that: · the amount of the break fee of US$7.78 million was to be compared with Coeur's external costs in relation to the proposed Scheme down to 12 November 2007 of US$7,127,442. Most of those costs were incurred after the MIA was signed. In fact and in summary, Coeur incurred costs in the order of US$1,338,835 before entering into the MIA, being approximately 20 percent of the external costs incurred down to 12 November 2007, and costs in the order of US$5,788,606 after entering into the MIA (being approximately 80 percent of the external costs incurred down to 12 November 2007); · Coeur's projected total external costs in relation to the Scheme if it should not be implemented were expected to be in the order of US$10,781,756. If the Scheme should be implemented, the costs were estimated to be approximately a further US$5,086,262; · the external costs incurred down to 12 November 2007 and the estimated total costs did not include Coeur's internal time and costs. For a period of approximately six months prior to signing the MIA, in addition to the external costs incurred, approximately 20 percent of Coeur's total management time was spent on this transaction, and after the execution of the MIA, approximately 50 percent of Coeur's total management time was spent on it; and · based on the above figures, Coeur's actual costs to 12 November 2007 were only 8 percent less than the amount of the break fee, and Coeur's estimated total costs were expected to be 39 percent more than the break fee. 35 Paragraphs 19 and 20 of Mr Krebs's affidavit were as follows: 19. On the basis of Coeur's estimated costs of the transaction (after receiving advice from Freehills, Coeur's legal representatives) at the time of entering into the MIA, Coeur took the view that it was reasonable to require Bolnisi to pay a break fee of US$7.78 million in the circumstances set out in the MIA, including that the Bolnisi shareholders did not approve the Scheme. 20. In forming this view, and estimating Coeur's costs of the transaction, Coeur took into account the fact that the transaction was particularly complex involving Canadian, US and Australian law, and shareholder approval requirements in each of those jurisdictions. In particular: (a) Bolnisi's main asset is an approximately 73% indirect interest in a Canadian company Palmarejo Silver and Gold Corporation (Palmarejo) (the approximately 27% of Palmarejo not owned by Bolnisi is owned by public shareholders) which company in turn indirectly holds 100% in a Mexican mining project (Palmarejo Project). Palmarejo is listed on the Toronto Stock Exchange. To enable Coeur to acquire a 100% interest in Palmarejo and the Palmarejo Project a concurrent plan of arrangement in Canada has been necessary. (b) Coeur is offering scrip. Although Coeur shares are quoted on the New York Stock Exchange and the Toronto Stock Exchange, they are not quoted on the ASX which has meant that Coeur has had to apply for quotation of CDIs on ASX. (c) The Palmarejo Project is located in a remote, rugged area in Mexico and, because construction of the Palmarejo Project is in the early phases, a significant number of third party technical experts (engineering firms, geotechnical firms, hydrology experts, environmental firms, etc.) have been needed to assist Coeur in determining the viability and ultimate cost to develop and operate the Palmarejo Project. (d) Since Coeur is a company incorporated in the United States, its accounting and financial information has historically, and for obvious reasons, been prepared and presented in US GAAP rather than AIFRS. I have been told by Rebecca Maslen-Stannage of Freehills and believe that ASIC indicated that it considered Bolnisi shareholders should be provided with certain information in AIFRS. The revisions to Coeur's financial and accounting information to comply with AIFRS required time and input from KPMG. (e) For the reasons set out above, the transaction occurred across several jurisdictions. There was consequently a need to take legal and technical advice in different jurisdictions which has been costly. 36 Mr Krebs's evidence outlined above supports the statement in clause 13.2(c) of the MIA that the amount of the break fee was agreed as "a genuine and reasonable pre-estimate of the loss which may be suffered" by Coeur in the event that the Bolnisi shareholders should vote down the Scheme. In fact, the amount of the break fee was an under-estimate of the total wastage of costs that Coeur would suffer. 37 The second aspect of Mr Krebs's evidence draws attention to the circumstances in which the reciprocal break fee of US$7.78 million is payable by Coeur to Bolnisi. Mr Krebs states in paras 21 and 22 of his affidavit: 21. As a matter of United States law, a Coeur shareholder vote is required to issue a number of Coeur shares in the Scheme in excess of 20% of the company's pre-transaction outstanding shares. In addition, a Coeur shareholder vote is required to approve the increase in the number of authorised shares from five hundred million to seven hundred fifty million. 22. I am also of the view that, had Bolnisi not agreed to pay the break fee in the circumstances set out above, Coeur would not have agreed to the reciprocal break fee payable to Bolnisi in circumstances where the Coeur shareholders do not approve either the issue of Coeur shares to pay the Scheme consideration or the increase in authorised number of Coeur shares. In sum, the break fee payable by Coeur is payable in comparable circumstances to those in which the Bolnisi break fee is payable: a failure by Coeur's shareholders to pass a resolution that its directors would wish them to pass in order that the Scheme be implemented. 38 I accept that if Bolnisi's directors had not agreed to the Bolnisi naked no vote break fee provision, Coeur's directors would not have agreed that Coeur should accept a liability to pay Bolnisi a break fee if the Coeur shareholders failed to pass a resolution increasing the number of Coeur's authorised shares.

Conclusion on the naked no vote break fee provision 39 In concluding that the naked no vote break fee provision was not objectionable for the purposes of the application under s 411 of the Act, I had particular regard to the following considerations: · the affidavit evidence referred to earlier showed that the amount of the break fee would not exceed the amount of the costs and expenses of Coeur that would have been wasted if the Scheme was not agreed to by the Bolnisi shareholders; · the affidavit evidence demonstrated that the directors of Bolnisi had believed that they were acting in the best interests of the shareholders of Bolnisi in agreeing that the break fee should be payable in the naked no vote situation; · the break fee was a reciprocal one, in the sense that an identical amount was payable by Bolnisi and Coeur and that it was payable by Bolnisi and by Coeur if the Bolnisi shareholders or the Coeur shareholders respectively should fail to pass a resolution on which implementation of the Scheme depended; · it was important for Bolnisi to have the benefit of the Coeur break fee provision and it could do so only if it agreed to the Bolnisi break fee provision; · the amount of the break fee was less than the one percent "ceiling" referred to by the Takeovers Panel in its Guidance Note 7: Lock-up Devices and could not be regarded as so large as to be likely to coerce shareholders into agreeing to the Scheme; and · the affidavit evidence of Mr Seckold, which I set out in my earlier reasons for judgment ([2007] FCA 1668 at [25]), was to the effect that the no shop, no talk and break fee provisions were agreed following arm's length commercial negotiations over a period of one month in which both Bolnisi and Coeur were separately advised and represented by external legal advisers and financial advisers with extensive experience in transactions of the present kind; and that Mr Seckold believed that it was in the interests of Bolnisi's shareholders that Bolnisi's directors agreed to the inclusion of the provisions.

Relief pursuant to s 1322(4)(a) of the Act 40 Section 249HA of the Act requires that at least 28 days' notice of the Scheme Meeting be given to Bolnisi's shareholders. Clause 94.2(b) of Bolnisi's constitution provided that a notice sent by post was taken to be served three days after the day on which it was posted. Consequently, on the basis that the Scheme Booklet and the notices of the meeting were despatched by post, Bolnisi needed to post them at least 31 days before the date fixed for the Scheme Meeting, 4 December 2007. 41 Affidavit evidence established that on 2 November 2007, a total of 3061 copies of the Scheme Booklet were lodged with Australian Post and posted to Bolnisi's shareholders. Of these, 2880 were addressed to domestic addresses and 181 to overseas addresses. Unfortunately, it was discovered that a further nine copies were required to be sent but had not been sent. They were lodged with Australia Post on 5 November 2007 and so dispatched to the relevant Bolnisi shareholders, who, apparently, all resided in New Zealand. 42 The evidence shows that in the ordinary course, these nine further Scheme Booklets would have been received by their addressees in New Zealand in three to four business days, ie, by 9 November 2007. On this basis, those addressees would have received only 25 days' notice of the Scheme Meeting, rather than 28 days' notice as required. 43 I was of the view that an order should be made under s 1322(4)(a) of the Act that the resolution passed by the Bolnisi shareholders was not invalid by reason of that irregularity.

Other matters 44 There was affidavit evidence before the Court on the second court hearing to the following effect: · the relevant documents in connection with the convening of the meeting of the Bolnisi shareholders were duly despatched to the Bolnisi shareholders; · at the meeting of the Bolnisi shareholders held on 4 December 2007, shareholders by number and value voted to agree to the Scheme - over 94.7 percent in number and over 99.4 percent in value; · all conditions precedent to the operation of the Scheme were satisfied by both Bolnisi and Coeur; · on 4 December 2007 the Palmarejo shareholders agreed to the Palmarejo Plan of Arrangement; · on 5 December 2007 the Ontario Superior Court of Justice approved the Palmarejo Plan of Arrangement in the form of Schedule A to that Court's order, pursuant to s 192 of the Canada Business Corporations Act, RSC 1985, c C-44 as amended; · the Palmarejo Plan of Arrangement would become effective on the day following approval by this Court of the Bolnisi Scheme (on 11 December 2007); and · ASIC provided a letter dated 10 December 2007 in terms of s 411(17)(b) of the Act.

CONCLUSION 45 For the reasons stated above and those delivered on 2 November 2007 following the first court hearing, I made the orders approving the Scheme on 10 December 2007.

I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Counsel for the Plaintiff: Mr IM Jackman SC and Mr DJA Mackay

Solicitor for the Plaintiff Minter Ellison

Counsel for Coeur d'Alene Mines Corporation: Mr RA Dick

Solicitor for Coeur d'Alene Mines Corporation Freehills

Counsel appearing as amicus curiae: Mr MB Oakes SC

Date of Hearing: 16 November; 5, 10 December 2007

Date of Judgment: 10 December 2007

Date of Publication of Reasons: 10 January 2008