Combatants show no concern over costs in Montana standoff

Friday 3rd August 2001

The latest decision of the standing committee of the Stock Exchange's market surveillance panel in the long-running battle between Lion Nathan and Allied Domecq for Montana Group is unlikely to be the last word, with talk of Lion Nathan likely to seek a judicial review.

Parties to the various complaints are incurring hefty legal bills, which will increase if the matter goes to judicial review and possibly further. The cover sheet to the standing committee's decision on whether Lion Nathan complied with requirements to sell its defaulted 19% stake in Montana to people who were not defaulters, and not to sell it pursuant to any form of contract, arrangement or understanding in place at the time of transfer, listed four sets of lawyers for the parties and counsel assisting the commission.

Montana had a team of three, with James Farmer QC as its head. Allied Domecq also had three advisers, one being Julian Miles QC. Alan Galbraith QC led Lion Nathan's three legal advisers and Richard Craddock QC was at the top of Credit Suisse First Boston's three.

Queen's Counsel of the calibre engaged for these inquiries can point to the old cliche that you get monkeys if you pay peanuts. The other eight lawyers were hardly the least experienced or cheapest in the profession. Someone has to pay for the services of counsel assisting the standing committee, Sarah Katz, and for the committee members: retired judge Sir Duncan McMullin, another Queen's Counsel in Bill Wilson and (in other Montana inquiries but not available in the latest exercise) retired judge Sir Ian Barker.

The committee decided Lion Nathan's selldown arrangement of 19% of Montana and a partial offer for 11% of Montana's issued shares at $5.50 a share amounted to "an arrangement or understanding" that would come into effect when the two transactions were completed.

The committee said: "The link between the sale of the defaulted shares and the offer to buy is such that, in reality, the purchasers do have the right to sell back the shares. This is in substance a put option. The absence of any binding legal commitment of Lion Nathan to purchase the shares does not detract from this conclusion."

Lion Nathan engaged Macquarie Bank to assist in the selldown of the defaulted shares. The bank contacted institutional investors regarding the sale. Macquarie said it developed a divestment process, intended to comply with the committee's ruling on the 19%, but also to ensure Lion Nathan was positioned as favourably as possible "in its ongoing takeover battle with Allied."

The two Macquarie staffers who were principally involved in the divestment process were instructed to make it quite clear to investors the shares were being sold outright and totally free of any restrictions. That was reiterated in the information sheet sent to investors.

After reference to comments from Lion Nathan investor relations director Warwick Bryan, quoted in the press, Allied submitted Lion Nathan was clearly intending to sell the defaulted shares to buyers on a basis whereby they could immediately sell them back under the certain terms of its impending offers.

"They were plainly assisting the institutions to price their bids in accordance with the various statements made."

The committee said counsel for Lion Nathan submitted the selldown and buyback did not amount to "an arrangement or understanding." They had said the instructions to investors from Macquarie Bank had made it "abundantly clear" that the bank, on behalf of Lion Nathan, had "been at pains to see that the standing committee's ruling was not infringed in any way."

The committee accepted Macquarie endeavoured to carry out a selldown in accordance with the committee's directions.

"However, it considers that, however it is presented, Lion Nathan's takeover proposal of July 1, 2001 links the purchase of the remaining Montana shares not already held by Lion Nathan with the selldown of the defaulter's shares in such a way that the bait for the selldown is the ability of the purchaser to take advantage of the attractive exit offer of $5.50 per share.

"It is of the view that the initial selldown of the 19% defaulted stake at figures likely to be no more than $4 per share and the firm offer to buy 11% back at $5.50 per share, although not made with specific parties, was a clear indication to the institutional investors to whom it was made that their purchase of shares in the selldown would be rewarded by a selling price of $5.50 per share."

The committee referred to a New Zealand High Court case involving Mercury Energy and Utilicorp, an Australian decision regarding Adelaide Holdings, and the grant of put options. Allied relied on those decisions, while counsel for Lion Nathan sought to distinguish them.

Without going into the detail of respective counsels' arguments for and against, it can be said the committee accepted Allied's case. Irrespective of whether the decision goes to judicial review and is then appealed further, or not, two things become clear in the Montana saga.

To quote the ridiculously obvious cliche beloved of rugby comments people, Lion Nathan and Allied "came to play" in their battle for the winemaker. The amounts laid out so far, and likely in the event of a successful full takeover from either side, represented a very high historical price/earnings multiple and showed little concern for costs involved in winning the fight.

The second matter was the "new order" governing these affairs. One does not need an oldie's memory to recall the days when they were outside the scope of stock exchange rules, takeover rules, other regulations and acts, committees and courts.

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