1. Introduction

It is essential to get the wording right in an engagement letter with a client otherwise potential success fees could be lost.

Greenhill Capital Partners (Greenhill Capital), a corporate advisory group, failed to convince the NSW Court of Appeal1 in April 2014 that Aztec Resources Limited (Aztec), its client, should have paid it a success fee in 2006 in respect of the takeover by Mt Gibson Iron Limited (Mt Gibson) of Aztec.

  1. Some facts

Greenhill Capital and Aztec entered into a deed in February 2006 which set out Greenhill Capital’s entitlement to a success fee if a bidder acquired a controlling interest in Aztec.

In July 2006 Mt Gibson made a hostile takeover offer for Aztec.

The Aztec board rejected the offer. However, on 22 November 2006 Mt Gibson acquired a controlling interest in Aztec. On 28 November 2006, the Aztec board recommended that shareholders accept the offer.

Shortly after this recommendation of the offer, Greenhill Capital sent an invoice to Aztec for its success fee.

Aztec refused to pay a success fee on the basis that it did not consider the conditions required for the payment of the success fee under the deed had been met.

Eight years after the takeover was completed, the NSW Court of Appeal has confirmed Aztec’s view that the conditions required for payment of the success fee had not been met.

  1. What did the deed say?

There was a long definition of “Success” set out in the deed.

The main point of contention was clause 11.5(a) of the deed which provided:

“11.5    For the purpose of clause 11.3, “Success” occurs when:

(a) a bidder acquires 50% or more of the shares in Aztec pursuant to or after the Initial Offer where the acquisition was recommended by a majority of the Aztec board (that is to say, the bidder formally acquires a controlling interest);”

Greenhill Capital contended that these words gave it an entitlement to its success fee.

Aztec said that success had not occurred within the meaning of the deed on the basis that Mt Gibson acquired 50% or more of the shares under its takeover offer at a time when it was not recommended or was the subject of a rejection by the majority of Aztec’s directors and thus no “Success Fee Event” as defined in the deed had occurred. That is, Mt Gibson had already acquired a controlling interest in Aztec (more than 50%) before the board of Aztec first recommended the offer on 28 November 2006.

Greenhill Capital’s view of clause 11.5(a) was that if Mt Gibson achieved a level of acceptance in respect of more than 50% of Aztec’s ordinary shares at any time during the offer period for its takeover offer and the Aztec board recommended acceptance of the takeover offer during that offer period, then they were entitled to a success fee.

The NSW Court of Appeal supported the interpretation of the deed by Aztec. Chief Justice Bergin said clause 11.5(a) of the deed connected the “recommendation” to the “acquisition” rather than the “offer”. In her view:

“Success under clause 11.5(a) of the Deed was agreed to occur when: (a) a bidder acquired a controlling interest in the respondent [Aztec] pursuant to or after the Initial Offer; where (b) “the acquisition” was recommended by the majority of the respondent’s [Aztec’s] board.”

A recommendation by the board of Aztec after Mt Gibson had already acquired a controlling interest the Judge said is not a recommendation in respect of or connected to the acquisition of a controlling interest and is not success within the meaning of clause 11.5(a) of the deed. The alternative interpretation proposed by Greenhill Capital said the Judge did not accord with commercial common sense.