Most of the ruling is based on technical grounds, including a decision that the four minority shareholders who brought the case had no legal rights to do so as they are not registered shareholders. However, the judge also gave some very straight forward comments that the claim may have been raised to pressure the defendants into buying the shares held by the minority shareholders at a higher price.
The case relates to Neptune CEO Idar IversenÆs purchase of additional shares in the company in March, which increased his stake from 10.7% to 55.4%, and the $185 million financing arrangement that Merrill put together to pay for it. The shares were acquired mainly from a Norwegian private equity firm and at NOK143 per share the price was equal to 10 times that firmÆs entry level and a premium of about 30% to the market price at time.
The financing consists of collateralised equity-leveraged loan securities (or CELLS for short), which are similar to a convertible bond in that they provide a bond-like return with equity upside on top û only they are much more structured and provides more security for the investors. The CELLS were bought by 11 investors, including two Merrill Lynch entities.
The four minority shareholders, which are all hedge funds and own a combined 39.3% of the company, sought to have IversenÆs acquisition declared void because they felt it was not done in the best interest of the company.
Specifically they objected to the fact that assets and cash flows of the main operating subsidiary were to be used as security for the highly structured financing and to pay the interest on the loan obligations, which were issued by a company wholly-owned by Iversen. As this type of financial assistance is illegal in Cyprus where Neptune is incorporated, the transaction violated company law, they argued.
According to a translation of the ruling, President of the First Instance Court M Christodoulou noted, however, that the transaction itself ôcannot be contested.ö What could be contested, he continued, is the financing and that could only be done in the case it - as argued by the applicants constitutes banned financial assistance on behalf of the company.
However, as the minority shareholders only asked the court to state that the purchase of the shares was not valid û not to rule on the actual financing - they ôdo not have any obvious, foreseeable prospect and possibility to succeedö in their application. He also saw no case for ordering Neptune to buy the shares originally acquired by Iversen.
The judgeÆs main reason for rejecting the minority shareholders claims, however, was the fact that their names donÆt appear on NeptuneÆs registry of shareholders (their shares are held through a Norwegian trust) and that they therefore arenÆt legally entitled to take this kind of action.
He did not comment further on whether the financing was of the kind that could be considered banned financial assistance. As with all complex financial transactions, Merrill would have sought extensive legal advise when the deal was put together, including on the use of financial assistance, and sources earlier said the bank felt the case was without merit.
The ruling in Cyprus opened the door for the final step of the financing to be completed and the transaction to be put to rest as another successful buyout financed by a highly structured and privately placed deal of the kind that is becoming increasingly popular among hedge funds looking for high return investments.
But this is not to be just yet, as the minority shareholders have said, through their lawyers, that they intend to refile the case in Cyprus once they have cleared up the current ownership situation to ensure their names appear in the register of shareholders û eliminating any arguments suggesting they arenÆt entitled to make these claims. They have also brought a separate case against the same defendants in Singapore, which is where NeptuneÆs operating subsidiary is based.
According to the lawyers representing the four plaintiffs û Millennium Global, Ore Hill, VR Global Partners and Luxury Capital Partners - they have been granted an injunction by the Singapore court that once again puts the financing transaction on hold.
Representatives for Merrill Lynch declined to comment on the ruling.
Based on the public information available regarding this deal, the further delay is likely to have little impact as the 11 investors have already put up the money and Iversen has bought the shares. With a 55.4% stake, he is now effectively in control of the business.
The part that remains outstanding is an approval by the Neptune board to set aside part of the companyÆs revenues and excess cash as an additional security for the money provided by the investors. According to sources, none of the investors have expressed any desire not to go ahead with the transaction, however, as they are confident the current issues will be resolved. The ruling in Cyprus has only strengthened this belief, and the fact that a separate case has been brought in Singapore changes little.
Given the complex and highly structured nature of these types of financing arrangements, most of them typically take months to complete anyway and the deal also offers the potential of quite attractive returns, which they obviously donÆt want to walk away from.
Contrary to Cyprus, Singapore does also allow financial assistance, including pledging excess cash flow of a company as security for a financing arrangement, as long as a so called ôwhitewashö procedure has been carried out. This suggests that the minority shareholders would find it even harder to win in Singapore.
Sources say they do feel they still have a case, however, as they believe such financial assistance is inappropriate in any jurisdiction. They also feel that the judge had ômisunderstoodö certain parts of their argument relating to the settlement discussions, which included an offer from Iversen to buy their shares for more than NOK200 each, and stress that the case was not brought to force a buyout of their shares or because they wanted a higher price, but because it the transaction doesnÆt benefit the company.
The translation of the ruling notes that the case was only brought to court after settlement negotiations between the minority shareholders and Iversen had fallen through. ôThere is,ö it says, ôa heavy shadow of suspicion that the claim has been raised by the applicants not to the benefit of the company, but to be used as a means of pressure to the defendants to serve the plaintiffsÆ personal interests.ö
For more details on this case and the transaction, please see two earlier stories published by FinanceAsia on April 4 and May 28.
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