***CASE NOTES: Midland’s deal with Luxe breaks down, unidentified investor buys Zap
Justice Roth’s deliberation on July 23 means there is strong possibility that Midland Group’s decision to negotiate a higher price with a second buyer for Zaporizhstal won’t pay off
Justice Roth’s deliberation on July 23 means there is strong possibility that Midland Group’s decision to negotiate a higher price with a second buyer for Zaporizhstal won’t pay off.
The transaction, which saw Russian investment bank Troika Dialog take control of the plant on behalf of an unnamed Ukrainian group, will not be affected by the UK High Court decision — all parties involved recognise the transaction was completed by May 26.
But Roth’s ruling that Midland should pay $110 million into a designated account where it will be frozen means the company could well end up out of pocket once the case has come to trial.
Guernsey-based Midland agreed to sell Zaporizhstal to Rinat Akhmetov’s Luxe Holdings for $690 million on May 4, pledging to transfer ownership of the plant on or before May 31. Akhmetov also owns Metinvest Holding.
But on May 19, Midland pulled out of the deal, telling Akhmetov it had found another buyer for the mill. On the same day it agreed to sell Zaporizhstal to Troika, which says it was acting on behalf of an unnamed Ukrainian group, for $850 million.
In a letter to Cyprus-registered Luxe, which is effectively owned by the Akhemtov family, Midland director Derek Roe enclosed SWIFT confirmations that all funds it had received from Luxe had been returned.
Roe also included payment confirmation for a further $50 million — designed to satisfy a “fine” for failing to complete the deal – as arranged in the two companies’ original agreement.
But Luxe was not satisified. The company believed Midland broke the terms of its agreement when it sold Zaporizhstal to Troika, petitioning the court to freeze a further $110 million in an interim injunction designed to protect its interests until the trial.
The company plans to capture the profits Midland made by selling Zaporizhstal to Troika, which it calculated at $160 million. Its case rests on the agreement it originally signed with Midland on May 4.
In this document the two parties pledged to sign a second sale and purchase agreement (SPA) on or before May 20. Until that date, the May 4 agreement would regulate their arrangement.
This meant that – should Midland avoid signing the second agreement by the nominated date – Luxe was entitled to terminate the original agreement and reclaim any money it had paid to the seller.
Should Midland refuse to enter into the second agreement, it was required to return all the funds Luxe had paid it, along with a fine of $50 million for failing to complete the deal.
So far, so good. Once Luxe made its first down-payment of $50 million, lawyers acting on behalf of the two companies traded draft versions of the second SPA.
The first signs the deal might be in trouble came on May 15, when Midland was scheduled to provide a list of the assets not included in the subject matter of the original agreement. It never appeared.
Lawyers acting on behalf of Luxe told the High Court they had tried to contact Midland Group co-founder Eduard Shifrin and his son Igor to discuss the deal. But they were unreachable and did not return calls for several days.
“Finally, at around 11am on May 18, Igor Shifrin called me,” Luxe’s Ukrainian lawyer, Mr Simonov told the court. “He assured me that Midland was busy working on the [second agreement] and checking that they would be able to give Luxe the warranties requested.”
“He also said that A&O [[Allen & Overy] the law firm acting on behalf of Midland Group] were finalising the restated agreement and they would send it to me before 2pm on May 19,” he said.
The next day the deal was off — Eduard Shifrin telephoned Rinat Akhmetov in person to tell him, and Roe’s letter to Luxe was dispatched by fax.
Communication between the two companies broke down, and both sides appointed counsel in the UK.
The negotiations for the sale of Zaporizhstal had so far focused on twenty companies that included Midland’s interest in the steelmaking plant. 17 of these companies were in Russia and Ukraine.
“Our client is concerned that you intend to sell the Companies to another buyer,” said UK law firm White & Case – representing Luxe – in a letter to Midland on May 20, adding that its client reserved the right to “seek injunctive relief against” Midland if it intended to sell its interest in Zaporizhstal to another party, or had done so already.
Midland was not entitled to terminate its agreement with Luxe, and the payment of $50 million it had made to Luxe in terms of compensation was “of no legal effect”, White & Case said.
Allen & Overy replied the very next day. “You do not […] provide any analysis at all supporting these assertions and we are, as yet, unable to see any legal basis for them,” the firm said. “We would therefore be grateful if you would provider [sic] a reasoned basis for your assertions in order that we can understand your client’s position properly, and advise our client accordingly.”
When White & Case wrote back on May 24, seeking confirmation of the two matters set out in its letter of May 20, the law firm received a prompt response.
“We write to inform you that Midland has sold its interests in the Companies to which you refer to third parties,” Allen & Overy said.
Midland might well have been busy making preparations for Zaporizhstal’s sale to Luxe, as claimed by Igor Shifrin on May 18. But the company was busy elsewhere as well.
“It is explained in the witness statement of Igor Shifrin that already by May 12 his father had been in discussions with the principles of an Ukrainian group that had approached him expressing an interest in buying the companies through the Russian investment bank, Troika Dialog,” Justice Roth said.
“He says that on about May 14 or 15 his father told him that he did not think the sale to Luxe was likely to go ahead and that he should concentrate on negotiations with Troika,” he continued.
The negotiations culminated when Midland and the buyers represented by Troika signed another sale and purchase agreement on May 19. The deal saw Midland cede ownership of Zaporizhstal for $850 million.