Regulator should check Cape Lambert and its playersFont Size: Decrease Increase Print Page: Print Bryan Frith | August 15, 2008 CORPORATE regulator ASIC should take a look at recent events concerning Cape Lambert Iron Ore to satisfy itself as to whether or not there might have been a breach of the takeover and substantial shareholding provisions of the Corporations Act.
The Foreign Investment Review Board and federal Treasurer Wayne Swan should also have a look to see whether there might have been a contravention of the Foreign Takeovers and Acquisitions Act (FATA).
Any enquiries should focus on the behaviour of Russian steelmaker Evraz -- part-owned by Russian billionaire Roman Abramovich and the state-owned China Metallurgical Corp.
Evraz created a stir last month when it popped up with a 19 per cent shareholding in Cape Lambert, only days before shareholders were scheduled to vote on approval of the sale of the company's 1.56 billion tonne Cape Lambert magnetite project to CMC for $400 million.
The bulk of the holding -- 15 per cent -- came through the purchase of listed options, which began back in April, and which were exercised immediately before disclosure was made.
The buying created speculation the Russian group had its own designs on the iron ore project and that it might seek to block the sale to CMC by voting against it, or make a bid for Cape Lambert as the shareholding might not be sufficient to prevent the sale going through. Cape Lambert's share price ran from 70c to 92c.
Alternatively, it was thought Evraz might use the stake as leverage to try to expedite Chinese regulatory approval of the Russian group acquiring majority ownership of Delong Holdings, which is listed in Singapore and owns a steel mill in China's Hebei province. Delong is controlled by Chinese businessman Ding Liguo.
In February, a complicated arrangement was announced in which Evraz would acquire at least 51 per cent of Delong, in a deal that valued the Chinese company at $US1.5 billion, but as yet regulatory approval has not come through.
Evraz gave credence to the bid speculation. The Russian group invited Cape Lambert's directors to a meeting in Singapore after its stake was disclosed where they were given the impression that Evraz didn't believe the sale to CMC would be good for the Australian company. The Cape Lambert board allowed Evraz to conduct due diligence and believed that a bid was in the wings.
Cape Lambert originally proposed to sell 70 per cent of the magnetite project to Delong for $250 million but that fell through. Delong acquired 40 million Cape Lambert options and exercised 12 million of them, giving it a 4.4 per cent shareholding in Cape Lambert. It proposed to exercise the remaining 28 million options, which would have lifted its holding to 13.25 per cent, but as yet that has not happened.
The Cape Lambert shareholder meeting was held on July 27. Representatives of Evraz and Delong attended and made it clear they wouldn't oppose the sale to CMC or a proposed $37.7 million capital return to shareholders, but would oppose the issue of 8.5 million options to employees and 11 million options to directors, all exercisable at 52c a share.
As a result, Cape Lambert withdrew the resolutions relating to the options and the sale to CMC was approved.
ASIC might well be interested in the like-mindedness of the voting intentions of Evraz and Delong in relation to the various resolutions.
It's possible for parties to have an understanding as to voting intentions without triggering a relevant interest in the other's holdings, but if they act in concert in relation to the company's affairs then they are associates, and that would trigger a relevant interest. If Evraz and Delong were associates, they would have a relevant interest in 24 per cent of Cape Lambert, without either making a takeover offer and that would be a contravention of the Corporations Act. It would also mean the substantial shareholding provisions were contravened.
Whatever, it's now clear that Evraz did have designs on the Cape Lambert iron ore project but it was not in conflict with CMC; in fact, it's difficult to avoid the conclusion they were working towards the same purpose.
Only three days after shareholder approval for the sale to CMC, Evraz announced that it had signed a co-operation agreement to establish a joint venture to develop the $1 billion project, with a projected annual output of 15 million tonnes of magnetite concentrate. Evraz would have a 75 per cent economic interest in the project and CMC the remaining 25 per cent. The deal was announced before the project had transferred to CMC.
It was anticipated that all of the output would be shipped to China, with CMC entitled to sign an off-take agreement for up to 60 per cent of the output.
There's no way that was all agreed to in the three days after approval of the sale. It's clear the negotiations would have taken some time and have been under way while Evraz was accumulating its stake. It appears Evraz had no intention of making a bid and that its buying was aimed at supporting the sale to CMC.
That raises the question as to whether Evraz and CMC are associates under FATA. If that were the case then it would have a relevant interest in Evraz's 19 per cent shareholding in Cape Lambert. And if, as is likely, CMC only received FIRB approval to acquire the iron ore project, then it would be in breach of FATA.
It must be wondered what the Treasurer thinks of all this. Swan presumably thought he was approving a Chinese acquisition of the iron ore project, but it now transpires that a Russian group has majority ownership, while the Chinese get all the iron ore. Evraz still needs FIRB approval to participate in the joint venture.
If Evraz now gets Chinese regulatory approval to consummate the Delong deal, it will need to exercise care to ensure it doesn't fall foul of Australia's takeover rules.
Under the substantial shareholding provisions, if a party holds more than 20 per cent of a company it is deemed to have the same relevant interest as the company has in any shares. Evraz has already bought 10 per cent of Delong from Best Decade, a company controlled by Ding and which owns 78 per cent of Delong. Evraz has also entered into put and call options over another 32 per cent, and on exercise Best Decade would sell another 9 per cent to Evraz, giving it 51 per cent.
Evraz would then be required to make a mandatory bid for the remainder of Delong, but Best Decade would retain 26 per cent.
Once the put and call options were exercised, Evraz would own more than 20 per cent of Delong and would have a relevant interest in Delong's 4 per cent of Cape Lambert. As Evraz already owns 19 per cent, that would take it above the bid threshold. One way to avoid any problems would be for Delong to sell the 4 per cent stake before Evraz goes above 20 per cent of the Chinese company.
Meanwhile, Cape Lambert raised some eyebrows by issuing the 8.35 million options to employees despite not putting the matter to shareholders for approval. For added measure they are exercisable at a lower price of 50c a share.
Cape Lambert wanted shareholder approval so it would not have to include the options in the 15 per cent of the capital that ASX allows companies to issue on a non-pro-rata basis in 12-month period without seeking shareholder approval. It apparently has now issued them on the basis that they are included in the 15 per cent and don't need shareholder approval. It might be legal but it's questionable behaviour.
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