Recently, the largest deal in luxury has made the headlines. This is especially so after the announcement that LVMH’s plan to buyout New York’s jeweler, Tiffany & Co, is back on the cards. The recommencement of negotiations comes after Tiffany& Co files a lawsuit against LVHM in an attempt to force it to close the deal. This lawsuit, if anything, is a reminder of the litigious nature of mergers and acquisitions generally.
Buyouts can be problematic for a variety of reasons given their multi-dimension nature. For instance, some M&A transactions are subject to regulatory scrutiny. This has been the case for the Tiffany-LVMH deal which was subject to anti-trust approval by the European Commission. In addition to competition law, contractual obligations mean that the parties to any deal may have recourse to contractual remedies. Another crucial aspect, which is the focus of this article, is oppression claims under sections 232 and 233 of the Corporations Act (Cth) (2001).
By way of an introductory remark, it is important to emphasise that takeovers and oppression claims don’t always coexist. Indeed, a claim for oppressive conduct could be brought in the absence of a M&A transaction. At the same time, not every M&A deal will be prone to an oppression claim.
ANTHONY SHEAR as trustee for THE LINKS FIELD TRUST v CAMPBELL [2020] WASC 391 (Anthony v Campbell) is a groundbreaking development in this area of law, in two respects. First, compared to the previous judgment in Hogg v Dymock, the ruling of Master Sanderson is revolutionary in that removal of a director, per se, no longer constitutes an oppression: [25]. Second, the Court seems to have altered the stance it has taken in Falkingham v Peninsula Kingswood Country Golf Club Ltd [2015] VSCA 16 where the Court refused to abort the merger given the significant loss of value that may ensue: [92]. In Anthony v Campbell however, the Court ordered the unwinding of the buyout transaction despite the high potential risk of significant loss of value: [30]-[31]. While this remedy is significant in terms of its repercussions and commercial soundness, it is not unallowed under the Corporations Act. Indeed, the suite of remedies for oppression is wide. And as section 233 uses an inclusive language, there is nothing in the terms of the Corporations Act which prevents a Court from ordering the reversal of a merger transaction.
In lawsuits for oppression, Courts will take in to account the circumstances surrounding a M&A deal. For instance, in Anthony v Campbell, the Court took a multi-factorial approach to a finding of oppression on the part of shareholders who failed to brief a shareholder on their plans to buy him out.
The factors alluded to by the Court invites us to distill the judicial guidance provided by the Court in order to work out ways to achieve an “oppression claim-proof” buyout.
Some perspectives on how to render an M&A deal, “oppression claim proof”
- Arms’ length transaction
Where an M&A deal is closed at arm’s length, the possibility of success of an oppression claim, is pale. This is because none of the parties involved in the transaction, will find himself or herself in a position of conflict. In Anthony v Campbell, the shareholders of a company incorporated a new company with the aim to effect a buyout of the old company in an attempt to buyout the other shareholder. Had the merger been initiated by shareholders with no link to the target company, a claim for oppression would not have crystallised.
- Arms’ length Business valuation
For pricing purposes, it is necessary that a business valuation be accurate. And in order to ensure accuracy, it is recommended that an independent expert valuation be obtained. If the price offered is fair in that it reflects market value, the chances of a court upholding a claim for oppression, become minimal.
- Independent legal advice
While this might be stating the obvious, it is important that parties in an M&A deal be represented by different lawyers. This is crucial given the fact that the parties’ interests are necessarily divergent. In Anthony v Campbell, the same lawyers acted for the buyer (the oppressing shareholders acting on behalf their newly incorporated company) and the seller (the oppressing shareholders acting on behalf of the target company) with knowledge of the breakdown of relations between shareholders of the target company.
- Oppression to shareholders acting in other capacities
Section 232 of Corporations Act does not only target a conduct that is oppressive to shareholders, its ambit extends to a conduct that is oppressive to shareholders who act in another capacities. As removal of directors might in some instances occur as part of a plan to buy-out a company, it is recommended that such removal be compliant with a company’s constitution and that grounds be provided therefor. While the removal of a director from a salaried position does not constitute an oppression, it might nevertheless among the factors considered by the Court as an indicium of oppression: [25].
- Compliance with contractual obligations
While the view can be taken that abiding by contractual obligations and the legislative provisions on oppression seem to be foreign to each other, such view is inherently erroneous. Indeed, the High Court of Australia in a case that related to a share sale, held that, the fact that the conduct in question constituted a breach of contractual obligations under shareholders and service agreements, did not preclude the application of the oppression provisions: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 [176]. Thus, it becomes immediately apparent that non compliance with contractual obligations is not a factor among others to be taken into account in an oppression lawsuit but rather an act, which on its own right, is constitutive of oppression. This, if anything, hints at the extent to which, Courts treat contractual breaches rigorously. Compliance with contractual obligations and in particular contractual warranties, might thus be an important shield of liability from oppression.
By way of conclusion, it suffices to observe that as long as Courts are prepared to reverse merger and acquisition transactions, an oppression lawsuit proves a real threat to M&A deals and might act as a disincentive for business owners. However, as demonstrated in this article, with the appropriate steps being taken, buyouts that are “oppression claim-proof” turn out to be a workable reality rather than a quixotic concept.
By Samar Ashour
Paralegal, The IP House Lawyers