Lawyer sees colleagues drinking deep from Lion Nathan's cup

Friday 8th June 2001

By Ross O'Neil

The Stock Exchange standing committee's ruling on the Lion Nathan/Montana affair has confirmed what has been obvious all along - sharebrokers' standard practice of "book building" often goes beyond seeking an indicative expression of interest, falling foul of the exceedingly wide definition of "transfer" in the exchange's listing rules.

Lion has said it has yet to decide whether to seek judicial review of the ruling but its opportunity to appeal appears limited. It would have to show that a principle or law was misapplied or the wrong process was followed. Given the high-powered standing committee and the carefully considered decision, this is unlikely.

The ruling raises a multitude of questions. Perhaps most crucial is the question of whether Lion must sell all its shares or only the 21 million acquired in contravention of the listing rules.

Despite the standing committee casting doubt it seems clear from the wording that (if Lion Nathan does not first do so) Montana may sell "all or any" of Lion Nathan's shares. The quantum is really a commercial decision for Montana, taking into account the need not only to force the sale of the "defaulter" shares but also the need to punish Lion Nathan.

While Montana appears to have the option of forcing Lion to sell all its shares, the risk that Montana takes is that the more aggressive its stance, the higher the probability that Lion will challenge that stance.

The standing committee has left it open to "counsel" to agree on the quantum, or it will hear counsel further on the subject. Does this mean all counsel must agree (not only counsel for Montana and Lion but also for Allied Domecq, Credit Suisse First Boston, and counsel assisting the standing committee), thus giving any number of parties an effective veto?

The parties may prefer the committee to decide which shares should be sold. The consequences of deciding this issue among themselves are so material that it would seem imprudent for the independent directors of Lion and Montana to risk personal liability.

What sort of scrutiny is applied to any sales process? There is no clear guidance in the listing rules. For example, although unlikely, it would seem that Montana could sell the shares to any person (including a related party of Lion), and that Lion is only required to transfer the shares "to a person who is not a defaulter." This extends only to any person who has acquired that relevant interest in breach of the listing rules. Despite restrictions on warehousing the restrictions leave it wide open for all kinds of unintended transactions.

The standing committee made it clear Credit Suisse First Boston owes fiduciary duties to both its clients and to Lion. The committee raised issues about whether these duties have been breached, both in the way CSFB pro-rated client entitlements and whether the "book build" methodology may cause Lion to suffer a loss. Lion will no doubt be considering its options.

The standing committee commented on the market surveillance panel's process for granting waivers. It said the present case is an example of how things should not have been done and noted the panel's decision has had "huge consequences."

Ross O'Neill is a partner at KPMG Legal

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