Unveiling the puzzle: lenders' appeal falls flat as Arrium officers avoid personal liability
In a recent decision, Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88, lenders to the Arrium Group, a company that collapsed, have lost their appeal regarding the personal liability of the Chief Financial Officer and Group Treasurer. The NSW Supreme Court had previously dismissed the lenders' claims, and the Court of Appeal has now affirmed that decision.
The lenders argued that the company officers were involved in misleading and deceptive conduct by authorising the preparation and issuance of drawdown notices on the company's loan facilities. These notices contained representations that the company was solvent and that there had been no adverse changes in its financial position. However, shortly after the drawdown notices were issued, the company entered voluntary administration. The lenders claimed that they advanced funds to the company based on these representations, which they now believe were false.
Below we delve into the key events and legal battles surrounding Arrium's collapse, highlighting the purported misrepresentations made by company officers and the subsequent fallout.
The mining consumables business: Arrium's jewel
Arrium Limited, an Australian public company, held a diversified portfolio of businesses spanning multiple countries, including its prized Mining Consumables (MolyCop) division. MolyCop was regarded as the crown jewel of Arrium, contributing significantly to its overall success.
As iron ore prices plummeted in FY15, Arrium faced severe financial challenges. To address its mounting debt, the company's board initiated a strategic review. This review encompassed various aspects, such as the sale of MolyCop, evaluating the viability of remaining businesses, and proposing a restructuring plan that required lenders to write off a significant portion of Arrium's debts.
Misrepresentations and debt agreements
Between December 2015 and February 2016, Arrium issued numerous drawdown and rollover notices to lenders. These notices contained representations stating that there had been no material adverse effect on Arrium's financial position and that the company remained solvent. However, these representations would later be called into question.
The going concern note and voluntary administration
In February 2016, bids for MolyCop were deemed unacceptable by Arrium's board. Concerns regarding the company's financial viability prompted the inclusion of a Going Concern Note in Arrium's half-year accounts. Subsequently, lenders rejected the proposed recapitalisation plan, leading the directors to place Arrium into voluntary administration in April 2016. Eventually, in June 2019, Arrium went into liquidation.
Following Arrium's collapse, legal proceedings were initiated, including an insolvent trading claim against Arrium's directors and two sets of proceedings brought by groups of banks. The plaintiffs alleged that they had advanced funds to Arrium based on false representations and sought to establish that earlier administration would have resulted in better returns for creditors.
The Court of Appeal's findings
The NSW Court of Appeal, however, upheld the primary judge's finding that Arrium was not insolvent at the time the drawdown notices were issued. The Court distinguished between "present insolvency" and the "prediction of the prospect of inability to pay a future debt when it becomes payable." As a result, the representations made in the drawdown notices were not false at the time they were made.
Furthermore, the Court of Appeal agreed with the primary judge's decision that the company officers did not engage in misleading or deceptive conduct. The Court considered that the involvement of the officers in making the representations was part of their role "as organs of the company", rather than as individuals. Therefore, a reasonable reader of the drawdown notices would not interpret the representations as being made by the officers personally.
Additionally, the Court affirmed the primary judge's finding that the company did not owe the lenders a duty of care in making the relevant representations. The Court emphasised that the lenders had the ability to protect themselves commercially and that they did not rely on the company's representations due to their capacity to make their own informed commercial judgments.
Lessons learnt
Arrium Limited's journey from a prominent Australian company to liquidation is a reminder of the perils faced by businesses in challenging economic environments. The case serves as a cautionary tale for companies grappling with financial difficulties, emphasising the importance of transparent financial reporting, diligent risk assessment, and adherence to fiduciary responsibilities.
The legal proceedings shed light on the complexities of establishing liability in cases involving misrepresentations and financial losses. The proceedings also highlight the need for lenders to conduct due diligence and make independent assessments when advancing funds, rather than relying solely on representations made by company executives.
The St Barbara board's bold move: a wise decision or missed opportunity?
Exclusivity terms and fiduciary duties are matters which boards have to take into account when assessing competing bids in M&A scenarios. One such example that has captured attention is the battle for St Barbara Limited's Leanora assets.
St Barbara and Genesis Limited announced a deal whereby Genesis would acquire the Leanora assets. This deal contained the usual exclusivity provisions that we have come to expect in public M&A in Australia. No shop, no talk and no due diligence provisions, with the no talk and no due diligence clauses subject to the usual fiduciary carve-outs.
Silver Lake Resources Limited then made a media release (note that this was not through ASX, suggesting that perhaps ASX did not approve an announcement regarding the Silver Lake proposal) that it had put a proposal to St Barbara in relation to the Leanora assets which appeared to be at a superior price point but with more conditionality to the Genesis deal. Silver Lake was seeking a short due diligence period before making a formal offer. St Barbara then released an announcement clarifying that the Silver Lake proposal was not superior so St Barbara could not rely on its fiduciary carve-outs to engage with Silver Lake. This was largely based on the conditions attached to the Silver Lake proposal. Silver Lake then made a further announcement that it has removed some of the conditionality. Again, the St Barbara board did not believe its fiduciary carve-outs had been enlivened. This led to Genesis making an improved offer and then on 19 May), Silver Lake putting a further proposal to St Barbara (Improved Proposal). St Barbara remains steadfast in its resolve to pursue the Genesis transaction, refusing to engage with the Improved Proposal, which is not regarded as a superior or feasible alternative. Further details are set out below.
Examining the St Barbara board's reasons
As noted, the St Barbara board determined that the previous iterations of Silver Lake's proposal did not meet the "fiduciary out" exceptions to the "no talk" and "no due diligence" obligations outlined in the agreement with Genesis. The St Barbara board questioned the viability of Silver Lake's proposal noting that the proposal simply offers a meagre premium, it lacked sufficient funding and upfront commitment.
Furthermore, the St Barbara board pointed out the unrealistic timeframe for due diligence and the weaker transaction rationale and synergies offered by Silver Lake compared to the existing Genesis transaction. These considerations played a crucial role in the board's decision-making process and reinforced their belief that engaging with Silver Lake would breach the terms of the existing Transaction Agreement with Genesis. Even when Silver Lake reviewed its proposal to remove some of the conditionality (including a shareholder approval requirement which created completion and timetable risk) the St Barbara board held firm in its belief that it was not a superior proposal.
What makes a bid superior?
To determine the superiority of a bid, value and certainty play crucial roles. An interloper must offer greater value than the existing deal, considering any improved terms offered by the buyer through matching rights. Bid strategy becomes crucial here, striking the right balance to avoid upsetting investors or experiencing a public failure. Superior proposals must also provide certainty of closing, taking into account financing arrangements and regulatory clearance risks. Seeking advice from experienced advisors is essential to evaluate competing proposals thoroughly.
The takeover's Panel has recently consulted on an update to its guidance note 7 (Proposed GN7), the Proposed GN7 emphasises that a target board, when exercising the "fiduciary out," should have the discretion to assess all relevant facts and circumstances to determine what is in the best interests of the target company and shareholders. It discourages overly restrictive interpretations of exclusivity arrangements and the "fiduciary out" that hinder a target board's ability to consider competing proposals that could reasonably lead to a superior offer.
Supporting engaging with Silver Lake
One notable voice in support of engaging with Silver Lake is a major shareholder of St Barbara, who believes that positive engagement with Silver Lake on their Improved Proposal could lead to better outcomes. This shareholder's perspective highlights the importance of thoroughly evaluating all available options.
Silver Lake's concerns and alternative avenues
Silver Lake expressed its concern over the St Barbara board's delay in engaging with them, stating that it contributed to significant timetable risks. Silver Lake's Improved Proposal, unlike the Genesis proposal, do not impose a penalty if shareholders do not approve the transaction before a specified date (30 June). This key difference offers an alternative avenue for St Barbara shareholders to exercise their rights and explore the potential for a superior offer.
St Barbara's unwavering commitment to the Genesis transaction
St Barbara's board has decided not to engage with Silver Lake Improved Proposal due to the proposal's non-binding and conditional nature, contrasting with the fully documented and supported binding Genesis transaction. The St Barbara board is concerned about the conditionality of the Silver Lake proposal, which would require termination of the Genesis transaction and expose St Barbara shareholders to uncertainties regarding Silver Lake's shareholder approval and other conditions precedent. The lack of substantiated offer price and synergies, as well as the historical trading patterns of Silver Lake shares, further contribute to the St Barbara board's decision. St Barbara emphasises that the Genesis transaction is fully funded, not subject to due diligence, and has garnered indications of support from 49% of Genesis' shares on issue. The Board concludes that there is no realistic pathway for the Improved Proposal to become superior and meet the fiduciary out exception.
Termination of the Genesis transaction could result in adverse consequences for St Barbara, including loss of the $400 million Genesis capital raising, potential debt covenant breaches, and operational pressures. The St Barbara board's rejection of Silver Lake's proposals has undoubtedly stirred up a conversation about the St Barbara board's approach and the potential implications for the company and its shareholders. As the story unfolds, investors and industry observers will be keenly watching to see St Barbara's (and Genesis') next move.
ASIC's greenwashing interventions: a call for transparency and compliance
The Australian Securities and Investments Commission has taken a significant step in its fight against greenwashing by releasing a concise report detailing its 35 interventions from July 2022 to March 2023. Report 763 highlights ASIC's commitment to promoting fair and transparent markets and protecting retail investors and financial consumers from misleading claims about environmental, social, and governance credentials. ASIC Deputy Chair Karen Chester emphasises the importance of the report in informing the market about regulatory actions taken against greenwashing, with a focus on corrective outcomes and the prevention of deceptive practices.
The report's key findings and its implications for businesses are:
- ASIC's interventions were driven by a clear objective: to counteract potentially misleading disclosures regarding green credentials. The report highlights the range of interventions employed by ASIC, which include securing timely corrections, issuing infringement notices, and initiating civil penalty proceedings.
- Of the 35 interventions documented, 23 resulted in corrective disclosure outcomes. This indicates that companies were compelled to provide accurate and updated information, rectifying any misleading claims about their environmental, social, and governance practices.
- ASIC's report reveals that in 11 instances, infringement notices were issued, delivering a clear message that greenwashing will not be tolerated. Such notices serve as a means of penalising companies engaging in misleading practices and further discouraging the prevalence of greenwashing.
- In one significant case, ASIC commenced civil penalty proceedings, signalling its determination to hold accountable those who intentionally mislead consumers.
- The report promotes transparency and educates the market on the nature of ASIC's interventions, including net zero statements, specific terms, fund labels, and investment exclusions.
- Businesses are urged to consider the report and Information Sheet 271 to ensure their sustainability-related disclosures have reasonable grounds and comply with the law.
Looking ahead: ASIC's report serves as a clear indication that the fight against greenwashing is ongoing. ASIC continues its surveillance and enforcement efforts, and Report 763 sends a clear message: the era of greenwashing is being challenged, and transparency and compliance are the paths forward.