JP Morgan's US$80 million bill spills into court
By John Helmer
MOSCOW - Court claims arising from an A$87 million (US$80.8 million) bill
presented after a more than year-long takeover battle for Australian miner
Consolidated Minerals (Consmin) are taking the lid of the remarkable list of
fees financial advisors feel able to charge - even when they back the losing
side.
JP Morgan (Australia) Ltd (JPM) in April 2008 issued a claim against
Consolidated Minerals (Consmin) in the Supreme Court of New South Wales for
A$86,978,264.18, with Clayton Utz the Sydney law firm representing the claim.
The sum represents the largest of several different calculations by JP Morgan
of the fees owed to the bank by Consmin, now under
new ownership, for service fees, commission fees, monthly cash retainers, and
expenses, including A$6.32 for a meal taken on a business trip somewhere
outside Australia.
Consmin has responded with a cross-claim, charging JPM, now led by Sydney
managing director Jon Gidney, with implementing terms that were superseded by a
telephone call of July 2006 between senior executives of the two companies.
Having, according to Consmin, verbally agreed then that the bank's advisory
fees would be capped at A$7 million, and after having paid JPM A$20 million in
full and final settlement in February 2008, Consmin is now charging JPM,
according to the court papers, with "unconscionable conduct within the meaning
of Sect. 51AC of the Trade Practices Act 1974".
That provision sets out the criteria the court may require for a showing of
reasonableness in providing, and necessity for charging for, a service. The
details of the section run to several pages. [1]
Consmin, represented by the Gadens law firm, is accusing JPM of misleading or
deceptive conduct in relation to the fee cap; double- and triple-charging for
the same non-service in a losing takeover defense; and demanding money out of
line with its practice with other clients.
This has led to a proviso that makes the case uniquely interesting to the
entire international mining market. According to Australian statute, JPM is not
permitted to levy charges for services at a higher charge than that in
"circumstances under which, the business consumer could have acquired identical
or equivalent goods or services from a person other than the supplier".
Moreover, JPM must demonstrate to the judge that its "conduct towards the
business consumer was consistent with the supplier's conduct in similar
transactions between the supplier and other like business consumers".
This has led to the application by Consmin for disclosure by JPM of comparable
fees it has charged other mining companies for takeover defenses between June
2005 and June 2007. The judge's order for production of these documents must be
complied with before the court is scheduled to resume hearing the case in three
months' time.
Publicly listed mining companies, with big share free-floats, rarely challenge
bank advisory fees for initial public offerings, mergers and takeover defenses.
An obvious reason is that borrowers are loath to bite the hand that feeds them.
But in this case, JPM raised no money for Consmin, and in fact failed in the
defense Consmin's shareholders sought against takeover.
The fierce competition between banks for clientele, and the rich pickings for
the individual bankers, have combined to make detailed information about
advisory mandates extremely rare. What has happened in this case is that JPM
has pushed the sole owner of Consmin, Ukrainian magnate Gennady Bogolyubov, too
far - about A$66 million too far - at a time when there is a global backlash
against banker bonuses and bank fraud.
Justice Patricia Bergin, the chief judge of the equity division of the NSW
Supreme Court, has held one hearing so far, and has scheduled the start of the
trial on February 22 next year. A thick file of court pleadings describes the
well-known contest for control of the Australian manganese miner by Brian
Gilbertson's Pallinghurst Resources and Bogolyubov's vehicle, Palmary
Enterprises.
The contest for Consmin began in October 2006, when Pallinghurst offered a bid
equivalent to A$2.08 per share. The following April, Central African Mining
& Exploration Co (CAMEC) made a confidential bid. This was followed by
other bids from Territory Resources Ltd at A$3.37 and Tinfos at A$3.75. On
August 31, 2007, Bogolyubov's Palmary made its offer at A$3.95. Competing bids
drove the price up to A$5.00. At that point, in December 2007, Pallinghurst
threw in the towel, accepting Palmary's offer for the stake Gilbertson had
amassed of Consmin. The final bid valued the mining firm at A$1.3 billion,
according to Forbes.com.
Palmary then took full control of Consmin, delisted the company, and was sent
JPM's invoice. The court papers show several calculations of the exact amount
Gidney and his associates are now claiming. The amounts depend in turn on JPM's
estimate of how much the Consmin share price went up over original offer prices
as the competitive bidding intensified. The fundamental principle of JPM's
claim is that it earned a share of this increment.
But Palmary, says Consmin, had nothing to do with JPM; was separately advised
by UBS; and was not introduced by JPM. Accordingly, Consmin is asking the judge
to rule that JPM failed to provide the services for which it is now seeking to
be paid; misrepresented what its fees for service would be prior to engagement;
failed in the defense which it had advised; offered a contract which should be
voided for uncertainty; and is not entitled to any success fee, because it
didn't earn it.
Consmin's defense also charges JPM with accepting a A$20 million check, and
banking it in February 2008, with the clear understanding that it was a full
and final settlement of its entire fee claim.
JPM's court filing sets out an elaborate structure of charges. In the first
place, it charged Consmin US$100,000 for signing up the big-name bank. This
payment was handed over promptly. Then JPM proposed a monthly retainer of
A$5,000, which, according to the bank papers, is still outstanding.
The commission and fee structure disclosed so far has four parts. What JPM is
calling its "Base Defense Response Fee" amounted to 0.75% of transaction value
"for advice in relation to an offer that proceeds to completion"; or 1% of the
proposed transaction value "in the event the Company successfully defends an
Offer".
Consmin is arguing this is payment for failure, which cannot be necessary, nor
justified in reasonable and ethical business practice.
On top of this charge, JPM has added a second charge, called "the Incentive
Fee" which, the company claims in court, "will recognize the achievement of
added value to the Company's shareholders beyond that contemplated at the
announcement of an unsolicited Offer, or initially proposed in relation to a
friendly Offer."
JPM has demanded payment of 3% of every offer increment from each one of the
bidders for Consmin during the takeover competition, including the bids that
failed, up to 25% of the difference between the original offer and the
concluding one. Then the JPM invoice demands a further "incentive fee" of "5%
of any increase in the Offer price in excess of 25% above the initial Offer
price, which was communicated to the Company publicly or privately."
According to Consmin sources, the A$20 million it offered and paid to JPM in
February 2008 was significantly more than the advisory fees Palmary paid UBS
for its victory.
The court argument is that by accepting and banking the check, JPM had agreed
to a settlement of all claims. Instead, JPM has submitted its calculations for
court award of the difference between the A$20 million received, and its three
fee estimates for the failed defense and Palmary success - A$87 million, A$57
million, A$51 million.
Broken down between JPM's failed advice, and Palmary's success on UBS advice,
the court documents show that JPM is demanding A$87 million for advising on the
three unsuccessful takeover bids - Pallinghurst, Territory, Tinfos - or A$57
million for Palmary's success.
The A$99,228 aggregate of expenses invoiced by JPM are also revealing:
international airfares of A$21,744 and Australian domestic airfares of
A$48,144; telephone calls worth A$3,764; Australian drinks and meals of
A$3,764; production and research charges of A$167; and one international
feeding of A$6.32. This is equivalent to a Big Mac meal, comprising burger,
medium fries and milkshake.
Gidney was asked to document this charge. He was also asked by telephone and
e-mail to clarify why JPM believes it is proper to claim duplicate or
triplicate fees for the same set of services rendered; and to explain how he
justifies fees for services that appear to have ended in failure, and for
Palmary's success, which was guided by a rival bank, at a significantly lower
charge. He declined to respond, adding: "I don't think there is any purpose in
having this discussion."
In its counter-claim, Consmin is demanding that JPM pay back A$13 million of
the A$20 million it has received, if Justice Bergin rules that the A$7 million
fee cap discussed by the two sides is enforceable. JPM is denying that the fee
cap was made by its executive. Consmin says that internal JPM documents to be
examined at trial show that the bank estimated A$5 million in fees for the
original mandate.
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