CASE NOTES

THE CLASH OF PERMITTED ASSIGNMENT PROVISIONS AMCI (IO) P/L & Westiron P/L v Aquila Steel P/L AMCI (BC) P/L & Belcoal P/L v BD Coal P/L, Aquila Resources Ltd and Ors [2007] QSC 238 (Queensland Supreme Court, 4 September 2007, Muir J) Interpretation of joint venture agreement assignment and pre-emptive rights provisions ­ Transfer `as of right' v 'change in control' ­ Whether corporate restructure amounted to a 'change in control' ­ Whether other participants had an option to purchase the joint venture interest on an assignment between related companies John Grace FACTS The case concerned the construction of the `Assignment and Pre-Emptive Rights' clause of two essentially identical Joint Venture Agreements (in essentially identical situations) between subsidiaries of Aquila Resources Ltd (Aquila), an Australian listed company and subsidiaries of the American Metals and Coal Industries (AMCI) group, being: the Premium Iron Ore Joint Venture Agreement dated 14 February 2005 between Aquila Steel Pty Ltd and Westiron Pty Ltd (Westiron) (Premium Iron Ore JV) concerning Pilbara iron ore interests; and the Belvedere Joint Venture (Coal) Agreement dated 7 April 2005 between BD Coal Pty Ltd and Belcoal Pty Ltd (Belcoal) (Belvedere JV) concerning Queensland coal interests. Both Westiron and Belcoal are subsidiaries of a chain of AMCI Australian companies headed by an Australian holding company, AMCI Investments Pty Ltd (AMCI Investments). Its immediate subsidiary AMCI Holdings Australia Pty Ltd (AMCI HA) held a range of coal interests. AMCI HA wholly owned WA Resources Pty Ltd which in turn wholly owned Westiron. The original AMCI corporate structure and the various restructures undertaken during the course of the Premium Iron Ore JV restructure are set out in Schedule 1 of the judgment. Essentially they were: On 27 July 2006, after the Premium Iron Ore JV was established, AMCI established a new wholly owned subsidiary of AMCI Investments called AMCI WA Pty Ltd (AMCI WA). On 22 December 2006, AMCI (IO) Pty Ltd (AMCI IO) was incorporated as a new wholly owned subsidiary of Westiron. On 26 February 2007, in the following sequence: Westiron transferred all its shares in AMCI IO to AMCI WA, thus removing it from being a subsidiary of AMCI HA: the transfer was resolved to be registered that day but

LLB (Vic), Grad Dipl Management (RMIT), Managing Counsel, Grace Legal, Melbourne.


The Clash of Permitted Assignment Provisions 415

through an oversight the transfer was not actually registered until 3 August 2007 ­ after proceedings were issued and immediately before the court heard argument; a new share certificate recording the new ownership of AMCI IO by AMCI WA was issued immediately (on 26 February 2007); and Westiron agreed to transfer its Premium Iron Joint Venture Interest to AMCI IO (with their respective directors resolving accordingly) the formalities of which transfer was completed that day, including payment of consideration and the formal requirements for an effective transfer set out in clause 14.4 which included execution of a Deed of Covenant and a Cross Charge by AMCI IO. Also on 26 February 2007: Belcoal transferred its interest in the Belvedere joint venture to AMCI (BC) Pty Ltd; and AMCI also agreed to sell all its shares in AMCI HA to the Brazilian mining company Companhia Vale do Rio Doce of Brazil (CVRD) giving CVRD control of the principal ACMI coal interests. On 29 March 2007, AMCI HA transferred all its shares in WA Resources to ACMI WA, such that Resources then became a wholly owned subsidiary of AMCI WA and AMCI HA ceased to form part of the AMCI group for relevant purposes. After assessing information requested from AMCI's legal advisers, Allens Arthur Robinson, Aquila retained Mallesons Stephen Jaques and Macquarie Bank and decided to challenge the internal AMCI restructuring transfers on the grounds that each was a `Change in Control' which gave Aquila an option to purchase the JV Interests under clause 14.5 of each Joint Venture Agreement. Nature of Actions On 24 April 2007, Aquila commenced proceedings against AMCI in the Supreme Court of Western Australia seeking declarations that there had been a `Change in Control' as a result of the AMCI restructuring. On the same day, AMCI commenced proceedings against Aquila in the Supreme Court of Queensland seeking a declaration that there had been no `Change in Control' as a result of the AMCI restructuring. The relevant subsidiaries of CVRD were also joined in the action as fourth and fifth defendants. The parties agreed to have the matter determined by the Supreme Court of Queensland and the hearing was conducted on 16 and 17 August 2007 in Brisbane. ISSUES At the centre of the dispute was the construction of clause 14, an assignment and pre-emption clause common to both joint venture agreements. This clause was in standard form and prohibited assignments or transfers (defined broadly) except as permitted. The two relevant permitted assignments were: a `Transfer' as of right to a `Related Body Corporate' within the terms of clause 14.2; and a transfer pursuant to an option to purchase arising under clause 14.5. The option to purchase was triggered if there was a `Change in Control' of a Participant to a person who was not a party at the `Commencement Date' being 14 February 2005 and 7 April 2005 for the respective Joint Ventures. As the relevant provisions of the Premium Iron Ore JV and the Belvedere JVs are essentially identical, the judgment primarily considers the issues arising under the Premium Iron Ore JV and applies the same reasoning by extension to the Belvedere JV. The principal point of difference


416 Case Notes (2007) 26 ARELJ

between the two is the existence and impact upon the Belvedere JV of an Exploration, Study and Purchase Option Agreement entered into by the then parties to the Belvedere JV on 20 July 2005 with subsidiaries of CVRD (EPSO Agreement). The relevant issues decided by Muir J in this case were:

(a)

(b) (c)

whether clauses 14.2 and 14.5 operated independently or concurrently ­ ie whether a `Transfer' as of right to a 'Related Body Corporate' pursuant to clause 14.2 was subject to the `Change in Control' provisions in clause 14.5; whether a transfer of a joint venture interest by Westiron to AMCI IO on 26 February 2007 triggered the change in control provisions in clause 14.5; whether any of the transfer of shares between related bodies corporate of AMCI triggered the `Change in Control' provisions in clause 14.5:

(i) (ii) on the same day but immediately prior to the transfer of a joint venture interest; or following the transfer of a joint venture interest.

Pursuant to clause 14.5(a), if a 'Change in Control' of a Participant took place, `the remaining Participants (and if more than one on a pro rata basis) have an option to purchase the Venture Interest of the Participant that is subject to the "Change in Control" at a purchase price to be determined in accordance with clause 14.5(b) within the period in clause 14.5(e).' 'Change in Control', for the purposes of clause 14.5, was defined to mean `a person who, as at the Commencement Date':

(a) (b) (c) did not have the capacity to control the composition of the board of a Participant or its holding company; was not able to cast or control the casting of more than 50% of the votes at a general meeting of the Participant or its holding company; or did not beneficially hold more than 50% of the issued share capital

but who was subsequently able to do so, subject to the following exceptions:

(i) (ii)

changes in control of a company listed on the Australian Stock Exchange; or for Westiron, where the Change in Control occurs as a result of a change in control of AMCI HA or the entities which controlled AMCI HA.

Transfer as of Right Clause 14.2 permitted Participants to `Transfer' all or part of their Joint Venture interest `as a matter of right' to a Related Body Corporate, provided that the assignee enter into `an appropriate deed of charge' and that it remain a Related Body Corporate of the Participant. If it subsequently became unrelated, it would be required to reassign the Joint Venture interest to the relevant Participant. Participant was defined as `Aquila and Westiron and their respective successor and assigns'. ARGUMENTS Aquila's arguments Clauses 14.2 and 14.5 operate concurrently because if ACMI's construction is to be accepted, there would be no work for the `Change in Control' concept after a transfer of a venture interest to a related corporation, even though it applied by reference to circumstances existing as at the Commencement Date. A plain reading of the definition of `Change in Control' indicates that if a person who is not in control of the composition of the Board or voting at a general meeting or with a majority


The Clash of Permitted Assignment Provisions 417

shareholding in Westiron or Belcoal as at the Commencement Date (14 February 2005-7 April 2005) subsequently obtains such control or holding, there is a relevant change, triggering clause 14.5 rights and obligations. As a result of the transfer of shares in AMCI IO from Westiron to AMCI WA (whereby AMCI IO became a wholly owned subsidiary of AMCI WA), AMCI IO had undergone a 'Change in Control' which activated the pre-emptive rights provisions in clause 14.5. All three limbs of the definition of 'Change in Control' could be satisfied as follows:

(a)

(b)

(c)

on 26 February 2007, when AMCI WA gained the capacity to control the composition of the board of IO, was in a position to control the casting of more than 50% of the votes at a general meeting of AMCI IO and held beneficially more than 50% of the share capital of IO; alternatively, on 29 March 2007, when AMCI WA was able to control the composition of the board of WA Resources, Westiron or AMCI IO and was capable of controlling the casting of more than 50% of the votes at a general meeting of AMCI IO; alternatively, from the date of registration of the share transfer (3 August 2007) on which date AMCI WA became a member of AMCI IO. From that date, AMCI WA beneficially held more than 50% of the share capital of AMCI IO and also had the ability to cast more than 50% of the votes at a general meeting of AMCI IO.

Should the court hold that clauses 14.2 and 14.5 do not operate concurrently, a `Change in Control' of AMCI IO occurred after the acquisition by AMCI IO of the joint venture interest because, although ACMI WA had a duly executed transfer of the shares the registration of which was approved by the board of directors of AMCI IO, the transfer was not registered until 3 August 2007: `Entry on the register is necessary to constitute membership of a company and ... the beneficial ownership of shares without registration does not make a person a shareholder.'1 Further retrospective operation of membership of the company as a result of registration `cannot alter the actual facts as they occurred'. AMCI's Arguments Clause 14.2 cannot be read as subject to clause 14.5: it operates independently. Clause 14 provides for five stand-alone means of transferring a joint venture interest, being a `Transfer':

(a) (b) (c) (d) (e) 'as of right' to a 'Related Body Corporate' under clause 14.2; with the written consent of the other Participants under clause 14.3; pursuant to the exercise of an option to purchase by a remaining Participant following a 'Change in Control' under clause 14.5; to a `Continuing Participant' that avails itself of the right of first refusal conferred by clause. 14.6; or to a third party `Proposed Transferee' in accordance with clause 14.6.

Compliance with one method (such as obtaining written consent under clause 14.3) would be sufficient to effect the transfer, and this could not then be overturned by clause 14.5 so as to deprive the new Participant of its interest. Nor could it be the intention that transfers 'as a matter of right' to a related body corporate under clause 14.2 would result in forfeiture of the joint venture interest.

1 FC of T v Patcorp Investments Ltd (1973) 140 CLR 247 at 295 per Gibbs J.


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Rather, the function of this clause was to safeguard the joint venturers against the intrusion of unwanted or unknown third parties. This is demonstrated by the restriction in clause 14.2(a)(i)(B) whereby the assignee must reassign the interest to the original Participant if it ceases to be a related body corporate. If Aquila's argument was right, AMCI could only ever transfer its joint venture interest to a related body corporate, without triggering a Change in Control, if it did it on the same day as the Commencement Date. This offends business commonsense. Further, c1ause 14.5 refers to more than a `Change in Control'; it refers to a `Change in Control of a Participant'. `Participant' is specifically defined to include assigns, such as AMCI IO and AMCI (BC) Pty Ltd. Aquila's argument ignores the fact that there has been no change at all in respect of either entity since they became Participants and `the seat of ultimate or effective control always remained the same', ie AMCI Investments and ultimately AMCI International AG. Countering Aquila's submission concerning the need for share registration to obtain control, AMCI contended that the principle that registration of a person as a shareholder operates retrospectively to the date on which the shareholder was entitled to have his name placed on the register.2 Accordingly AMCI WA gained the capacity to control AMCI IO, if this was relevant, no later than 26 February 2007. DECISION Muir J agreed with AMCI and found that clause 14.5 did not override clause 14.2. He noted that the `Joint Venture Agreement is a commercial document intended to establish the legal relationship between co-venturers in a large scale mineral exploration and development project. In determining rights and obligations under such a document, in the absence of a clear indication to the contrary, the parties should be regarded as being concerned with substance over form and technicality and "no narrow or pedantic approach is warranted".' REASONS Did Clauses 14.2 and 14.5) Operate Independently or Concurrently? Answer: Independently Muir J held that `the parties, by clause 14.2, .... intended to deal with transfers of joint venture interests to related corporations in a way which provided its own protections against changes in control of the assignee' for the following reasons: Clause 14.5 `should not be seen as imposing some qualification of or fetter on the rights of a transfer conferred by sub-clauses 14.2, 14.3 and 14.6'. A transfer made with the written consent of the other participant under clause 14.3 would not invoke clause 14.5. Moreover, a participant's ability to transfer to a 'related body corporate' as 'a matter of right' also `strongly suggests that its operation is not qualified by clause 14.5. The `right' would be significantly circumscribed if a consequence of its exercise was to trigger the right to exercise an option under clause 14.5'. `An even stronger indication that clause 14.2 is not intended to be subject to or qualified by clause 14.5 is provided by 14.2(a)(i)(B). There would be little or no point in the obligation to retransfer in clause 14.2(a)(i)(B) if clause 14.5 is to operate in circumstances in which clause 14.2 applies'.

2

FC of T v Patcorp Investments Ltd (1973) 140 CLR 247 at 296 per Gibbs J; see also Jacobs J at 303, which was applied in Kingston v Keprose Pty Ltd (No 3) (1987) 11 NSWLR 404 and in Rivkin Financial Services Ltd v Sofcom Ltd (2004) 51 ACSR 486 at 518-519.


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`The conventional approach to construction would suggest that the general provisions of clause 14.5 be read subject to the more specific provision, and that the latter take precedence over the former'. `The parties intended by clause 14.2 to confer freedom to move from time to time the joint venture interest to a related company. The conditions attached to the right were that the assignee had to maintain its relationship and the assignor had to continue to be bound by the terms of the Joint Venture Agreement. Where an assignment of a joint venture interest is effected under clause 14.6 (a right of pre-emption), the assignor incurs no such obligation'. `Aquila's argument focuses unduly on "Change in Control" whereas clause 14.5 operates only where there has been a "Change in Control of a Participant" who holds a Joint Venture Interest'. `...no sensible reason would be served by triggering the operation of clause 14.5 merely because a transferee of a Participant's interest, although a related company of the Participant at the time of the transfer, had not always enjoyed that status'. Did the Transfer of a Joint Venture Interest by Westiron to AMCI IO on 26 February 2007 Trigger the Change in Control Provisions in Clause 14.5? Answer: No. Muir J held there was no `Change in Control' as Aquila alleges which triggered the operation of clause 14.5 of the Premium Iron Ore JV or the Belvedere JV. He noted: `"Capacity to control" does not correspond precisely with actual, present or direct control. It accommodates circumstances in which a person has the ability to take such steps as are necessary to give him actual control. The expression is apt to accommodate the circumstances existing on 26 February 2007 under which AMCI WA held a transfer of the shares in AMCI IO capable of immediate registration and a share certificate which showed that the shares were held in its name.' `The transfer and share certificate were obtained in the course of a series of transactions between related corporations designed in part to ensure that full ownership of the shares in AMCI IO and control over its board was vested forthwith in AMCI WA. In such circumstances a conclusion that AMCI WA lacked "the capacity to control" would be both pedantic and remarkable.' Similar reasoning applies to paragraphs (b) and (c) of the definition. For these reasons, there was no `Change in Control' because AMCI always had the capacity to control the relevant Participant. Did any of the Transfer of Shares between Related Bodies Corporate of AMCI Trigger the Change in Control Provisions in Clause 14.5? Answer: No. Muir J held that: An object of `the definition of "Change in Control" is to ensure that an option given to one party to acquire the interest of another is triggered where there is a change in the ownership or control of the first-mentioned participant or in any companies above it within its group'. `a principal reason for such a provision is to ensure that a joint venturer should not be obliged to accept a stranger as a co-venturer, at least without having the opportunity to acquire the interest of the co-venturer which has experienced a change of ownership or control.' `...none of the prescribed events in the definition "Change in Control" has effect for the purposes of clause 14.5 with respect to AMCI HA and any other member of the group above AMCI HA in the corporate chain.'


420 Case Notes (2007) 26 ARELJ

Remaining Matter The CVRD defendants were neutral on the issue of whether `a Change in Control' had occurred giving rise to an option under clause 14.5 of the Belvedere JV. But if Aquila was successful on that issue, CVRD argued: its rights were in any event extinguished or qualified by the EPSO Agreement which granted to RDA an option to acquire a 51% interest in the Belvedere JV; and further its equitable interest under that option has priority over any interest of Aquila arising under clause 14.5. In view of the conclusions he had reached above, Muir J found it unnecessary to decide this issue. CONCLUSION In each proceeding, Muir J made the principal declarations sought by AMCI. In the Premium Iron Ore JV matter, he ordered that all defendants pay AMCI's costs including reserved costs. In the Belvedere JV matter, he ordered that Aquila pay AMCI's and CVRD's costs including reserved costs. Comment: This case demonstrates that the conclusion reached by John Kelly in his excellent paper `Rights to Acquire'3 that, while Assignment and Pre-Emptive Rights provisions in Joint Venture Agreements `have many similar features' and have `given rise to a plethora of judicial decisions', `it is ultimately a matter of construing the terms of the particular contract in light of the relevant facts and circumstances'. Postscripts:

1 2

3

Aquila has appealed, and the appeal is due to be heard shortly. On 19 July 2007, CVRD (RDA) gave notice under the EPSO Agreement of its intention to exercise its option to purchase a 51% venture interest in the Belvedere Coal Joint Venture by payment of USD45 million to each of Aquila and AMCI. On 4 September 2007, Aquila announced that if it were successful in obtaining an option to purchase under clause 14.5 of the Belvedere Coal Joint Venture, that option `would not impact upon RDA's purchase option in respect of the 51% venture interest in the Belvedere Coal Joint Venture.'

3 [2006] AMPLA Yearbook 59.