break fee and poison pill

Does Lundin?s break fee stand a chance?
TIM KILADZE
Globe and Mail Update
Posted on Wednesday, March 30, 2011 11:18AM EDT

Inmet Mining and Lundin Mining have publicly said they amicably walked away from their proposedmerger, but the lingering $120-million break fee casts a shadow on thatrosy public image.

Shortly after the two firms announced they were parting ways on Tuesday,they made it perfectly clear that Lundin would still have to pay Inmet a$120-million break fee if Equinox?s takeover bid is successful.
That payment seems a bit odd considering the two miners agreed to ?mutually terminate? their arrangement agreement.
Digging through that specific document, the break fee was required underany one of three scenarios: one company?s board of directors withdrawsor changes its recommendation on the merger; a third party makes a bidand Lundin or Inmet?s shareholders don?t vote in favour of the merger;or one company?s board accepts a superior proposal.

At this time, none of those three things has happened. However, it lookslike Inmet is trying to tie the break fee to the second scenario,considering that Equinox?s bid remains on the table. But the questionis, does that scenario even apply any more, considering the arrangementagreement has been completely terminated? That?s probably a decisionthat the courts or a regulator will have to make.

Lundin has also put a poison pill in place, which is a rare tacticconsidering that the shareholder rights plan is being instituted mid-bidand a third party has already emerged.

It?s somewhat similar to 2005 when Inco and Falconbridge Ltd. struck afriendly takeover agreement, which was then upended by Xstrata PLC?shostile bid for Falconbridge. When bidding, Xstrata applied to haveFalconbridge?s shareholder rights plan struck down, stating that thepill had already been in place for nine months.

Ultimately the Ontario Securities Commission rejected Xstrata's requestto remove the poison pill, and the Ontario courts ruled thatFalconbridge didn?t need to call a meeting of shareholders to put theplan to a vote.

However, its important to note that Xstrata already owned 20 per cent ofFalconbridge at the time of its bid because that factored into theOSC?s decision. Had Xstrata acquired any more shares, it might have beenable to block any competing bids.

More recently, Baffinland tried to institute a shareholder rights planafter reaching a deal with ArcelorMittal last fall, but the OSC struckthat request down because a second bid from Nunavut Iron Ore was alreadyon the table.

This case could be a bit tricky, though. Technically Lundin shareholdersdidn't get a chance to vote between two competing bids because theInmet-Lundin merger was shut down without their say.

Moral of the story: Lundin is doing whatever it can to make Equinox's bid as difficult as possible.