This article is the second of a three-part series analysing the decision of Justice Martin in Glendina Pty Limited & Ors v NKWE Platinum Ltd (2025) SC (Bda) 15 Civ – the first "fair value" appraisal claim under section 106 Companies Act 1981 (the "Companies Act") to go to trial in Bermuda in about 15 years – and its implications for future appraisal actions. The decision provides useful guidance on a number of issues that will typically arise both in appraisal claims of this kind and for boards contemplating a merger or amalgamation.
Conyers acted for the defendant company, NKWE Platinum Ltd ("NKWE"), and we summarised the decision in our first article, "Fair Value" In Appraisal Actions Under the Companies Act 1981 S 106(6).
This second article focuses on an issue that is bound to be of interest to practitioners generally in the field of amalgamations and mergers, namely the duty of independent directors who are appointed for the purposes of seeing through the takeover process.
Background
NKWE and its subsidiaries are involved in the acquisition, exploration and development of platinum group and associated base metal projects in South Africa. During the period 2008 to 2010 NKWE acquired a 74% interest in a licence to mine platinum group metals in an area known as the Bushveld Complex and thereafter began exploration.
In March 2018 NKWE announced that its majority shareholder1, Zijin Mining Group Co. Ltd, had made a bid to acquire a one hundred percent interest in NKWE by means of an amalgamation under section 104 Companies Act at A$0.08 per share. NKWE appointed two independent directors to oversee the amalgamation and in August 2018 the independent directors signed the amalgamation agreement with an increased offer price of A$0.10 per share. By NKWE's bye-laws, the super-majority (75%) vote required by section 106(6) Companies Act at the shareholders' meeting to vote on the amalgamation was reduced to a simple majority on board approval.
Accordingly on 24 October 2018 the shareholders at the SGM voted in favour of the amalgamation and approved the amalgamation agreement. On 14 March 2019 the amalgamation became effective and the appointment of the independent directors ceased. The Dissenters' shares in NKWE were cancelled and replaced with a right to receive the amalgamation price.
The Dissenters owned about 20% of NKWE's shares and, being dissatisfied with the offer price, they exercised their rights under section 106(6) Companies Act seeking an appraisal by the Court.
The Appointment of Independent Directors
The statutory regime governing amalgamations and mergers is contained in sections 104 to 109 Companies Act. However, there is no requirement under these sections for an amalgamating or merging company to appoint independent directors to participate or oversee the process. The appointment usually comes about as a consequence of the amalgamating or merging company's listing rules (the consequence of a go-private scheme) or as a consequence of the commercial imperative of wanting to appear to have acted fairly in a process which involves minority shareholders compulsorily losing their shareholding.
The result is that in many appraisal actions the role of the company appointed independent directors comes under scrutiny. This is particularly so where reliance is placed on the amalgamation or merger price either to determine, or as a yardstick for, fair value. Invariably the minority shareholders will seek to demonstrate that the independent directors were creatures of the company and failed to scrutinise the proposed transaction in accordance with their duties. In this way the minority shareholders will attempt to undermine the amalgamation or merger price as representing fair value.
The Duties Owed by Independent Directors
As Martin J pointed out "there are few if any Bermuda cases in which the Court has considered the duties of directors in this situation". He thereby hoped that this case would serve as a "useful illustration" of some of the issues that independent directors face when accepting an appointment.
The Court found that consistent with the conventional view, independent directors owe their duty to the company. This duty includes a duty to take into account the interests of the minority shareholders when faced with a bid to compulsorily acquire the shares of the minority. However, the Court considered that it was vitally important that the directors should act as objectively and transparently as possible and without forming any view of whether the proposal should or should not proceed due to subjective factors (for example the possible desire of some shareholders).
As to how this duty to the company, while taking into account the interests of the minority shareholders, resolves in practice, two particular recommendations in the judgment stand out as being of general application.
First, the independent directors should not exclusively rely on the company's own lawyers but should rather instruct independent Bermuda attorneys to advise them on the scope and extent of their duties under Bermuda law and how they should seek to discharge their duties to the required standard. Secondly, independent directors should seek financial advice to enable them to interpret and, if necessary, interrogate the assessment carried out by the expert employed by the company to draft a fairness opinion.
An aspect of the independent directors' approach that the Court was especially critical of was their assumption that that their duty was to act in the interests of the minority shareholders and that their role was thereby to get the minority shareholders the best offer they could in the circumstances. This in turn led the independent directors to doing things which the Court regarded as inappropriate. They should not, for example, have shared the Dissenters' views on the offer price with the expert instructed to produce the fairness opinion. The impression created was that this simply gave the expert forewarning of what the objections might be so they could be dealt with in the fairness opinion.
The approach taken by the independent directors (to act in the interests of the minority shareholders) led them to accept the bidder's "final offer" as being fair on the basis that was as good a price as the minority shareholders were going to get based upon the bidder's lack of appetite to pay any more. The Court considered that the proper approach would have been independently to assess fair value based on the information they had and to stick to their guns.
The Court additionally made a number of fact specific criticisms of the independent directors. These included their failure to keep written records of meetings, their premature acceptance of the valuation in the fairness opinion when it was yet to be finalised and their failure to make follow-up enquiries when it was discovered that the valuation spread in the fairness opinion had changed. These criticisms were made in circumstances where the independent directors' approval of the amalgamation proposal had significant consequences for the minority shareholders: under the company's bye-laws, board approval of the amalgamation reduced the statutory super-majority (seventy-five percent) to a simple majority for shareholder approval at the Special General Meeting convened to approve the amalgamation.
Consequences
For obvious reasons, companies in appraisal actions will usually wish to rely on the merger or appraisal price as representing fair value for the minority shareholders' shares. In anticipation of this, companies will now need to be prepared to fund the independent directors' instruction of separate attorneys to advise the independent directors of their duties under Bermuda law. Companies will also need to be prepared to fund the independent directors' instruction of an expert who can assist their interrogation of the fairness opinion produced by the company's appointed expert(s). This will add both to the time and expense of the oversight process by the independent directors.
This will be especially the case where a company's bye-laws provide for the reduction of the vote for shareholders' approval at the SGM from a statutory super-majority to a simple majority on board approval of the amalgamation or merger. Where the company wishes to rely on the amalgamation or merger price as representing fair value for the minority shareholders' shares, a Court is likely to pay particular attention to the way in which the independent directors oversaw the process. For companies, forewarned is forearmed.
Footnote
1. Holding 60.47% of NKWE's issued share capital.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
