On June 26, 2012, Justice Wilton-Siegel of the Ontario Superior Court of Justice released his decision in Barrick Gold Corporation v. Goldcorp Inc. et al. dismissing Barrick Gold Corporation (Barrick)’s claim that Goldcorp Inc. (Goldcorp)’s acquisition of a 70% interest in the El Morro copper/gold project (El Morro) breached the shareholders’ agreement governing El Morro and Barrick’s conditional agreement with Xstrata Copper Chile S.A. (Xstrata) to purchase the 70% interest. The decision sheds important light on the principles that animate rights of first refusal and similar liquidity arrangements in shareholders agreements generally.
The El Morro copper/gold project is a major mineral deposit, high in the Andes in northern Chile. 70% of El Morro was owned by Xstrata, while the other 30% of the project was owned by a subsidiary of New Gold Inc. (New Gold) Pursuant to the terms of a shareholders’ agreement1 between Xstrata and that New Gold subsidiary, each party held a right of first refusal (ROFR) over the other’s shares in El Morro; in the event that either of them received an offer for their shares that they wished to accept, the non-selling shareholder would have 60 days to match the third party offer, and purchase the shares from the departing shareholder for itself.
In 2009, Xstrata began an auction process for its 70% stake in El Morro. In the fall of 2009, Barrick and Xstrata entered into a conditional sale agreement for Xstrata’s interest. Given the ROFR in the El Morro shareholders’ agreement, one condition precedent to Xstrata’s agreement with Barrick was that New Gold waive or not exercise its ROFR.
Following the execution of the Xstrata/Barrick sale agreement but before the ROFR expired, Goldcorp and New Gold entered into the Acquisition and Funding Agreement, pursuant to which:
Goldcorp agreed to lend a New Gold subsidiary the $463 million required to exercise the ROFR;
The New Gold subsidiary would then purchase Xstrata’s 70% interest following the exercise of the ROFR; and
Goldcorp would then acquire the shares of that New Gold subsidiary from New Gold and pay New Gold an additional $50 million.
Given that New Gold had exercised its ROFR, the Xstrata/Barrick sale agreement was frustrated as the condition precedent in that agreement concerning the waiver or non-exercise of the ROFR was not satisfied. The transactions between Xstrata and New Gold, and then New Gold and Goldcorp, closed in February, 2010.
The Barrick Claim
The shareholders’ agreement governing El Morro provided for certain restrictions on transfer of each shareholders’ rights and interests under the agreement, including the ROFR. Barrick commenced an action against Goldcorp, New Gold and Xstrata (and certain related companies), alleging that, among other things, in completing the transactions described above, New Gold had effectively “sold” or “transferred” its ROFR to Goldcorp, in breach of the shareholders’ agreement. Barrick argued that because New Gold’s alleged exercise of the ROFR was improper and invalid, the ROFR had, in fact, expired unexercised, and the conditions precedent in the sale agreement between Xstrata and Barrick had therefore been satisfied. Accordingly, Barrick asked the court to order specific performance of its agreement with Xstrata, which, if granted, would require Goldcorp to transfer the 70% interest in El Morro that it had acquired from New Gold pursuant to the Acquisition and Funding Agreement to Barrick.
In the action, Barrick attempted to characterize the Acquisition and Funding Agreement as the unlawful sale or transfer of New Gold’s ROFR to Goldcorp. However, while Justice Wilton-Siegel accepted that it would be possible to characterize the economic effect of the Acquisition and Funding Agreement in several different ways, one of which could be a sale of the New Gold ROFR to Goldcorp for $50 million, he went on to state that the issue before the court was a legal issue – whether the transfer restrictions contained in the shareholders agreement had been breached, given the structure of the Acquisition and Funding Agreement.
No Sale or Transfer of the ROFR
Beginning his analysis, Justice Wilton-Siegel characterized the ROFR as a contractual right to purchase the selling party’s interest in favour of the non-selling party that, once triggered, becomes akin to an option. In other words, once the selling party received an offer from a third party that it wishes to accept, the non-selling party’s ROFR effectively becomes an option to purchase from the selling shareholder on the same terms and conditions as the offer received from the third party. The ROFR therefore provides the non-selling shareholder with qualified protection against the intrusion of a third party that it is not willing to accept as a joint venture partner, with a companion right on the part of the departing shareholder to receive the same consideration as it would have received had it completed the proposed sale to that third party. Justice Wilton-Siegel expressly rejected the proposition put forth on behalf of Barrick that the purpose of a ROFR is to allow the selling shareholder to exit its investment at the highest price as “manifestly incorrect”.
Justice Wilton-Siegel held that, in principle, the ROFR could be assignable in its own right. It was only the restrictions contained in the shareholders’ agreement on the transfer of a shareholder’s rights or interests that would place limits on the freedom of the non-selling shareholder to enter into an agreement with a third party with respect to its ROFR.
In finding that the Acquisition and Funding Agreement did not constitute a sale or other form of transfer of New Gold’s ROFR to Goldcorp, much of Justice Wilton-Siegel’s analysis focused on the conditionality of the transactions contemplated by the Acquisition and Funding Agreement. Justice Wilton-Siegel found that the Acquisition and Funding Agreement was, in substance, not a sale or transfer of the ROFR, but instead an agreement of New Gold to sell the 70% interest in El Morro to Goldcorp, conditional upon New Gold first purchasing that 70% interest from Xstrata pursuant to the exercise of the ROFR, which was, in turn, conditional upon Goldcorp lending to New Gold the funds required by it to purchase that 70% interest from Xstrata. Justice Wilton- Siegel noted that the fact that the Xstrata/Barrick sale agreement itself was conditional on New Gold’s waiver or non-exercise of the ROFR highlighted the importance of the structure of a transaction in determining whether and when a transfer of a right or interest had occurred. In particular, he commented that, but for the condition precedent concerning the waiver or non-exercise of the RFOR, the Xstrata/Barrick sale agreement would itself have resulted in a prohibited transfer of Xstrata’s rights or interests.
Justice Wilton-Siegel found that, under the shareholders’ agreement, a promise to convey property only becomes a transfer of that property at the point in time the commitment or promise becomes unconditional. Thus, only when New Gold became unconditionally bound to sell the 70% interest in El Morro to Goldcorp was there any transfer of a right or interest of New Gold under the shareholders’ agreement, and that did not occur until after New Gold completed its purchase of the 70% interest from Xstrata following the exercise of the ROFR. Because there was no transfer of a right or interest from New Gold to Goldcorp until after Xstrata had exited the company, the restrictions on transfer therefore served no further purpose vis-à-vis Xstrata.
Transfer Restrictions do not Prevent On-Sale of Interest to be Acquired
Barrick also alleged that any agreement between New Gold and a third party to “on-sell” the 70% interest to be acquired by New Gold pursuant to the exercise of its ROFR would fall afoul of the transfer restrictions, if that agreement was entered into prior to New Gold actually acquiring the 70% interest from Xstrata. As Justice Wilton-Siegel found that when a selling shareholder is disposing of its entire right or interest in a property, it is exiting the project and therefore any restriction on the subsequent transfer of that property would not be for the benefit of the departing shareholder, there would be no rationale to allow the departing selling shareholder to assert the benefit of the restrictions on transfer to prohibit an agreement between the non-selling shareholder and a third party for an on-sale of the interest to be acquired by the non-selling shareholder pursuant to the exercise of the ROFR. In so finding, he rejected Barrick’s assertion that allowing New Gold to agree with Goldcorp in advance that it would sell Goldcorp the 70% interest, conditional on New Gold first acquiring that interest from Xstrata, would result in a “commercial absurdity”. In that respect, he noted that the parties were in agreement that there would be no prohibition on New Gold entering into a purchase and sale agreement with Goldcorp after it had completed its acquisition of the 70% interest from Goldcorp and he saw no rationale that the restrictions on transfer would serve by prohibiting New Gold and Goldcorp so agreeing prior to the exercise of the ROFR, provided that the proposed transactions were properly structured.
Risk of Closing with Xstrata Remained with New Gold
Barrick further asserted in the action that, even if, in form, New Gold was the party committing to purchase the 70% interest from Xstrata, in substance, New Gold did not bear any risk associated with that transaction as Goldcorp had agreed to fund the purchase. In Barrick’s view, because New Gold did not bear the risk associated with closing the purchase pursuant to the ROFR, New Gold was not exercising the ROFR for itself and the ROFR must therefore have been transferred to Goldcorp.
Justice Wilton-Siegel did not accept Barrick’s argument that New Gold did not bear any risk once it gave notice of its intention to exercise the ROFR. He found that, in the event that Goldcorp failed to fund New Gold’s purchase of Xstrata’s 70% interest, it was New Gold and New Gold alone that remained liable to Xstrata to complete the purchase of Xstrata’s 70% interest following the exercise of the ROFR. Justice Wilton-Siegel found that while New Gold would possibly have a contractual claim against Goldcorp for its failure to abide by the Acquisition and Funding Agreement, this did not mean that New Gold did not bear the risk vis-à-vis Xstrata of its commitment to purchase the 70% interest arising from its exercise of the ROFR.
Given the plain meaning of the Acquisition and Funding Agreement between Goldcorp and New Gold, Justice Wilton-Siegel found that New Gold did not grant Goldcorp the right to exercise the ROFR in either form or substance, nor did New Gold sell or otherwise transfer the ROFR to Goldcorp. He found instead that the Acquisition and Funding Agreement expressly provided that New Gold would exercise the ROFR, which it did. If New Gold had failed to exercise the ROFR, Goldcorp could have looked only to New Gold for breach of the Acquisition and Funding Agreement and not to Xstrata. Goldcorp did not, at any time, become entitled to assert the benefit of the ROFR against Xstrata, nor did Goldcorp purport to exercise the ROFR or to close the transaction directly with Xstrata. Similarly, Xstrata could look to New Gold and New Gold only if it failed to complete the acquisition of the 70% interest following the exercise of the ROFR. The only transfer of a right or interest under the shareholders’ agreement between New Gold and Goldcorp occurred after New Gold had completed its acquisition of the 70% interest from Xstrata. Given the structure of the transactions, and the fact that Xstrata was exiting the project, nothing New Gold or Goldcorp had done therefore interfered with the commercial purpose of the transfer restrictions in the shareholders agreement.
Going forward, it seems likely that one impact of this decision on the negotiation of shareholders agreements in the future will be to cause parties to expressly provide for whether a transaction such as the Goldcorp/New Gold transaction will or will not be permitted under the contract (i.e.,by expressly prohibiting a “pre-arranged” on-sale or by implementing a “hold period”). More generally, the decision also reinforces the view that transactions that are structured to comply with the terms of an agreement will not be deemed to be unlawful simply because of the fact that an alternative transaction structure that would have achieved the same economic result would have been in breach of the agreement. In other words, the concept that “You can’t do indirectly what you can’t do directly” is not a maxim of general application to commercial transactions. The decision also provides a useful overview of the rationale and principles that underlie rights of first refusal and similar liquidity provisions in shareholders agreements, and is likely to be an important reference point for future disputes in this area.
Mark Gelowitz, Allan Coleman and Geoff Hunnisett represented Goldcorp in the litigation discussed in this article.
1 The shareholders agreement is governed by the laws of Chile and therefore certain of the applicable principles of contractual interpretation were governed by Chilean law, although Justice Wilton-Siegel commented that many of these principles would also apply under Ontario law.