The New South Wales Court of Appeal was persuaded by commercial sense in construing the conditions for payment of a takeover success fee.  The Court rejected an argument that the parties envisaged payment of the success fee even where the target board continually recommended against the takeover (until after a controlling interest was already attained), instead finding that a recommendation after the bidder had already attained a controlling interest was not a recommendation in respect of or connected to the acquisition of the controlling interest.  This case demonstrates the importance of a clearly drafted success fee clause that accurately reflects the parties’ intentions.

Aztec Resources Limited (Aztec) agreed to pay Greenhill Capital Partners (Greenhill) a ‘success fee’ in connection with an anticipated takeover offer or merger proposal from Mt Gibson Iron Limited (Mt Gibson) pursuant to a contract which defined ‘success’ as when “a bidder acquires 50% or more of the shares in [Aztec] pursuant to or after the Initial Offer where the Offer was recommended by a majority of the Aztec board. (that is to say, the bidder formally acquires a controlling interest).

Mt Gibson made a takeover offer for Aztec shares.  The Aztec board initially urged shareholders to reject the offer.  After Mt Gibson attained a controlling interest, the Aztec board recommended acceptance of the offer.  Aztec refused to pay the success fee on the basis that the conditions for payment had not been met.

   The New South Wales Court of Appeal considered the definition of success (which it commented exhibited a degree of ‘confused thinking’) and:

  • rejected the argument that the success fee was payable if Mt Gibson attained a controlling interest and the Aztec board recommended acceptance of the takeover offer at any time during the offer period.  To suggest that the parties envisaged payment of the success fee where the Aztec board recommended against the takeover and the acquisition occurred anyway, was lacking in commercial sense; and
  • found that the success fee was only payable if the Aztec board recommended the acquisition before Mt Gibson acquired a controlling interest.  On a proper construction, the recommendation was tied to the ‘acquisition’ of the controlling interest as opposed to the ‘offer’.  A recommendation after Mt Gibson had already attained a controlling interest was not a recommendation in respect of or connected to the acquisition of the controlling interest.

The Court also refused to order rectification of the contract to the effect that success would occur when “in respect of an Initial Offer, a bidder achieves a level of acceptance in respect of more than 50% of Aztec ordinary shares and at any time during the offer period for the Initial Offer, the Aztec board recommends acceptance of the offer.”  In this regard, Greenhill failed to:

  • displace, by clear and convincing proof, the assumption that execution of the contract meant that it reflected the true agreement of the parties; and
  • for this purpose, establish a concurrent or common intention (ie that Greenhill was entitled to the success fee if at any time the Aztec board recommended acceptance of the acquisition) that was not reflected in the contract.

See the case.