In a landmark decision last week, a Jamaican high court judge held that people who use privately held firms or special purpose vehicles in takeover bids must show that they have the cash, or access to the money to finance the deal.
Justice Ingrid Mangatal's ruling, which can be challenged at appeal, came as she upheld a claim that the offer document in the hostile take-over bid by Billy McConnell's Black Sand Inc for the Lascelles deMercado Group was flawed in large part because of its failure to prove that it had the money to effect the payout.
She also held that the offer document contained a falsehood that was unsatisfactorily remedied, in a claim that Lascelles planned to unload lucrative shares in the Carreras Group to raise cash to help out hard-up Trinidadian parent, CL Financial.
But the case largely turned on the interpretation of the burden placed on offerors in takeover efforts by the mergers and acquisition regulations and rules of the Financial Services Commission (FSC) and the Jamaica Stock Exchange (JSE).
Concluded Justice Mangatal: "... Indeed, TOM (take over and merger) regulation six (of the FSC) and general principle four of the JSE place an onus on the offeror to ensure that a false market in the offeree company's shares is prevented. In my judgment, this clearly implies that the offeror should satisfy itself, and take every reasonable step to ensure, that it is able to, or will be able to implement the offer in full."
In circumstances where a company was private, with no public access to its accounts, the judge held that a declaration of confidence by the bidder of its ability to find or raise the money was insufficient.
In that event, she ruled, the Black Sand bid for Lascelles could not be equated to the approaches of Bank of Nova Scotia during its acquisition of merchant bank Dehring Bunting and Golding (DBG), and Lascelles' earlier take-over by the Trinidadian firm Angostura. These cases were friendly acquisitions, unlike Black Sand's hostile bid.
Said Justice Mangatal: ".. In relation to Angostura and BNS, both were well established publicly traded companies, listed on the stock exchanges of Trinidad and Jamaica, respectively. They had a track record and audited financial statements so that their asset base and work could be substantiated or objectively verified in their capacity to meet the bid. Financial assurances were given and accepted by these bidders.
"Black Sand, on the other hand, is a private company incorporated in St Lucia weeks before the bid circular was issued. It has no financial statements, audited or otherwise. It has no trading history. Black Sand has not held itself out as itself having adequate funds to meet the bid in full.
"Whilst there are claims of equity commitments from 'sophisticated investors' such as Pan Jamaican Investment Trust Ltd and Octavian, no details have been provided of those commitments. There was no irrevocable commitment by an entity upon which reliance could be placed, such as a bank. The Macquarie Capital letter is not a commitment or a letter of intent, which is what the FSC had asked for."
Lascelles deMercado is one of the Jamaica's largest conglomerates, among whose subsidiaries are J. Wray and Nephew, blenders of the famous Appleton brands of rum.
It was primarily to get its hands on the Appleton brand that CL Financial, then controlled by Lawrence Duprey, in mid-2008 acquired Lascelles, paying nearly US$900 million for the company. The deal, at the time backed by McConnell, Lascelles' then CEO, was predicated on creating economies of scale between the Appleton and the Angostura brands of spirits for global expansion.
But a year later CL, dragged down largely by the financial services arm of the group, went belly-up, leaving a mountain of outstanding debt, including over US$300 million in notes, for which the Lascelles stocks were used as collateral.
Lascelles defaulted on those notes in July and has been negotiating with bondholders since then. Almost immediately after the default, Black Sand, whose chairman is McConnell, announced its offer to pay out bondholders and acquire the instruments that were in default. This would give Black Sand control of the company.
The Black Sand bid should have triggered a directors' circular on the offer from the Lascelles board, but they argued that the bid document was defective and withheld advice to the company's shareholders.
The FSC agreed with Lascelles that the offer document was not compliant with the rules, and asked Black Sand to provide evidence "such as an independent confirmation of the commitment by way of a letter of intent from Macquarie Capital (USA)" of the financing of the US$270 million for which the Black Sand principals would apparently look to the markets.
In a supplement to the bid document, Black Sand asserted that Macquarie had "confirmed in writing ... that subject to due diligence, was highly confident of its ability to provide and/or raise US$270 million on behalf of Black Sand to complete the offer". Equity holders were to provide US$102 million.
The FSC accepted that position, but Justice Mangatal argued that the regulatory agency settled for less than for what it asked.
She said: "... Even by its own standards and requirements, the FSC failed to follow through in obtaining the necessary proof. The letter from Macquarie is dated July 22, 2011, which is a date that preceded the takeover bid. The letter is not issued in respect of that bid."
Further, Justice Mangatal noted that Macquarie stated in the letter that it was not a binding commitment to raise capital, and that any such obligation would depend on a formal written agreement and was rendered to Black Sand "solely for your use in connection with the decision to made an indicative proposal" for the Lascelles takeover.