This case arose out of a takeover ‘success fee’ that was expressed to be conditional on a recommendation by a majority of the target board.   In finding that the success fee was not payable, the Court interpreted the relevant clause to require genuine board approval of the takeover, and not just a capitulation following the bidder acquiring a controlling interest.  Both companies and their advisers need to carefully consider and define criteria for payment of a success fee, particularly where control of the payer may change before the payment is to be made.

Aztec Resources Limited (Aztec) agreed to pay each of Greenhill Capital Partners (Greenhill) and Macquarie Bank a ‘success fee’ in connection with an anticipated takeover offer or merger proposal from Mt. Gibson Iron Limited (Mt. Gibson) in 2005.  ‘Success’ was defined in the contracts to include a bidder acquiring at least 50% of the Aztec shares where the acquisition was recommended by a majority of the Aztec board.

In 2006, Mt. Gibson made a takeover offer for Aztec shareholders, conditional on Mt. Gibson acquiring at least 90% of the Aztec shares.  The Aztec board fervently urged shareholders to reject the offer (and continued to do so until Mt. Gibson eventually attained a controlling interest in Aztec).  Greenhill and Macquarie Bank became concerned about the payment of their success fees and Greenhill sought (but the Aztec board refused to give) assurances that the fee would be payable regardless of Aztec board approval.  Following Mt Gibson’s attainment of a controlling interest in November 2006, the Aztec board subsequently recommended acceptance of the offer.  Macquarie Bank then demanded payment of its success fee which the Aztec board agreed to pay, citing in minutes that the main criteria for payment, namely acquisition of a 50% interest and board recommendation of the takeover, had occurred.

Nearly 6 years later, Greenhill claimed its success fee from Aztec, contending that:

  • on a proper construction of its contract with Aztec, the definition of ‘success’ required two separate events to occur - the acquisition of a controlling interest by a bidder and board recommendation of the bid; and
  • the order of these events did not matter - the contract did not require that the board recommend the bid prior to the bidder acquiring the controlling interest. 

In rejecting Greenhill’s contentions, Hammerschlag J gave precedence to the plain meaning of the words in the contract, and was not satisfied that there was sufficient ambiguity to justify regard to the surrounding circumstances to construe meaning.  His Honour also noted that the more commercially sensible interpretation of ‘success’ would be a takeover that in fact had the support of the Aztec board, and regarded the ultimate recommendation by the board as more of a capitulation than genuine support.

Hammerschlag J also refused to rectify the contract to reflect the alleged true intention of the parties that the success fee be payable regardless of board approval, finding that there was insufficient evidence of such intention and the parties were sophisticated commercial entities who contracted with the assistance of lawyers.  Mt. Gibson’s payment of the fee to Macquarie Bank failed to sway His Honour as the Aztec board’s reference to the satisfaction of the main criteria implied that not all criteria had been met and there was no further evidence of the Aztec board’s motivations in paying such fee.

See the case.