Key Points:

A takeover adviser's success fee depended on the timing of the target board's recommendation.

A corporate adviser failed to get a contractual success fee for a recommended takeover, because "success" depended upon the timing of the target board's recommendation.

The NSW Court of Appeal held that, under the contract, the fee was only payable if the board recommended the bid before the bidder got to 50%; a recommendation after the bidder had already got to 50% did not meet the requirements of the contract.

Background

Aztec contracted to pay a corporate adviser a "success" fee. The contract defined "success" as: "a bidder acquires 50% or more of the shares in Aztec … where the acquisition was recommended by a majority of the Aztec board".

Mount Gibson launched a bid for Aztec. The Aztec board recommended against acceptance. Nevertheless, the acceptances rolled in and Mount Gibson got to 50.52%. Six days later, Aztec's board ran up the white flag and recommended the bid.

The adviser sent in its invoice for the success fee. The Aztec board refused to pay, and the adviser took it to court.

There were two issues for the Court.

The first question was whether "success" in the contract meant:

  • the Aztec board recommended the bid and a bidder subsequently got to 50%+ (Aztec's argument); or
  • the Aztec board recommended the bid at some point before or after the bidder had acquired 50%+ (the adviser's argument).

The second issue depended on the answer to this question. The adviser argued that, if the contract meant what Aztec claimed (ie. that the fee was only payable if the bidder got to 50% after a target board recommendation), then that was not what the parties had intended. In that case, the contract should be rewritten to make it clear that the fee was payable even if the board recommendation followed the bidder's getting to 50%.

Recommendation before or after control had already changed?

The NSW Court of Appeal held that the idea that a success fee should be payable when shareholders rejected their board's recommendation and accepted the bid was "lacking in commercial common sense".

Among other things, it ignored an important fact: the contract stated that the success payable was payable where "a bidder acquires 50% or more of the shares in Aztec … where the acquisition was recommended by a majority of the Aztec board" [emphasis added]. In the Court's view, that "acquisition … recommended by a majority of the Aztec board" was the acquisition of 50%. In this case, the bidder had acquired 50% of Aztec before the board had recommended that acquisition.

Did the parties mean something else?

As noted above, the adviser argued that, if the wording of the contract had the meaning argued by Aztec, the contract was wrong, because it did not reflect what the parties had actually agreed. Accordingly, argued the advisers, the contract should be "rectified" (ie. rewritten by the Court to reflect what the parties had really meant to say).

This argument was rejected for two reasons.

The first was that there was nothing obviously wrong with the idea that the success fee should only be paid if the change of control occurred after Aztec's board had recommended the bid. That interpretation could only be displaced if there were sufficient evidence to show that the parties had intended otherwise.

After examining evidence about the negotiation of the contract, the Court concluded that there was insufficient evidence to show that the contract did not reflect the parties' intentions.

Comment

One does not have to be a fan of Bob Dylan ("there's no success like failure/And … failure's no success at all") to know that "success" is not a term with only one meaning.

It is fair to point out that the negotiation of the contract in this case was a drawn-out and complicated process, involving more than one adviser. It is, therefore, possible that, at some point, the adviser and the company unconsciously parted ways on what they were trying to achieve. 

That said, the Court thought that the wording of the contract - and, crucially, the contract's definition of "success" – was fairly unequivocal. The lesson for both potential takeover targets and their advisers is to ensure that there is near to absolute clarity about the central clauses of their contract, particularly if those clauses involve terms, such as "success", which, in popular parlance, can have a variety of meanings.