Gold Fields and Harmony fork out millions in takeover battle

Harmony’s unsuccessful £3.5bn hostile takeover of Gold Fields has
left the rival South African mining companies with hefty legal bills.
To date, Gold Fields’ lawyers – South Africa’s Edward Nathan & Friedland, Linklaters and Skadden Arps Slate Meagher & Flom – have billed approximately £10m. Gold Fields will have spent more than R200m (£16.6m) in defence costs once the final bill comes in.

Harmony, which was advised by Hogan & Hartson and Cliffe Dekker, has to date incurred £16m in advisory fees. As first reported by The Lawyer (6 December 2004), Harmony budgeted a flat fee of £760,000 for legal advice, but that figure started to spiral out of control when Gold Fields decided to use litigation to fight the bid.

The seven-month battle concluded on 20 May when the South African High Court ruled that Harmony’s offer for Gold Fields had lapsed on 18 December 2004. The court ruled that the South African Securities Regulation Panel had acted beyond its powers by extending Harmony’s offer too many times.

Throughout the saga, Gold Fields launched several legal challenges in a bid to derail Harmony’s bid. Litigation is becoming an increasingly common defence tactic in hostile takeovers. For instance, last year Marks & Spencer sought an injunction to prevent Freshfields Bruckhaus Deringer from acting for Philip Green on his £9bn bid for the retailer.

Linklaters corporate partner Charlie Jacobs, who advised Gold Fields, acknowledges that, in the absence of a silver bullet or a challenge on competition grounds, litigation is the next best defence tactic in a hostile takeover.

Last November Gold Fields launched a challenge in the New York courts regarding Harmony’s inconsistent reserve statements. Jacobs argues that, although the action was unsuccessful, it highlighted concerns over Harmony’s gold reserves.

Gold Fields also failed to get Harmony’s bid blocked on competition grounds. Gold Fields argued that the only way Harmony could achieve costs savings was through redundancies. And although the bid was cleared by the South African Competition Tribunal, the regulator imposed limits on the number of retrenchments Harmony could make. This then raised questions about where else Harmony could achieve the cost-savings.

“The outcome of the individual judgments doesn’t matter. The judgments raised important questions about Harmony’s gold reserves and how it was going to achieve cost savings,” says Jacobs.

However, Hogan corporate partner Elizabeth Katkin, who advised Harmony, described the New York action as frivolous and a waste of time. “The courts weren’t willing to allow litigation to be used as a delaying tactic. The only claim that wasn’t dismissed was the one in the South African High Court,” she says. “In the US market, the litigation hurt Gold Fields very badly.”

And although Katkin conceded that it was absolutely right for Gold Fields’ lawyers to think of novel ways to defend their client, she argues that there is a fine balance between advising a client on defence tactics and acting irresponsibly.

“Spending $5-$10m (£2.7m-£5.5m) on litigation is not responsible,” concludes Katkin.

Main legal challenges
Date Challenge Verdict
Nov 04 Application by Gold Fields (G) to the Competition Tribunal (CT) for a ruling preventing Harmony (H) from implementing the early settlement offer prior to CT approval. Lost
Nov 04 Appeal by G to the Competition Appeal Court against the CT ruling above. Partial win
Nov 04 Application by G to the High Court for a ruling preventing H from proceeding with the proposed merger on the grounds that a prospectus should have been issued. Lost
Nov 04 Appeal by G to the Supreme Court of Appeal against the judgment of the High Court. Lost
Nov 04 Application by G to the High Court to obtain access to certain confidential information disclosed by H as part of the CT proceedings. Lost
Nov-Dec 04 Application by G in the US regarding H’s reserves statement and an attempt to have H and Norilsk declared joint bidders. Lost
Nov 04 Application by H to the High Court for a ruling preventing G from voting its American depository receipts (ADR) discretionary proxy. Lost
Dec 04 Request by G for rulings to the executive director of the Securities Regulation Panel in respect of H’s bid. Lost
Oct 04 Appeal by G to the panel against the ruling of the executive committee relating to the ADR discretionary proxy. Partial win
Nov 04 Appeal by G to the executive committee against a decision of the executive director in respect of the appropriateness of G’s financial advisers to give the requisite fair and reasonable opinion. Lost
Mar 05 Opposition by G to the CT approving the merger. Lost
May 05 Final High Court decision. Win
 
Source: Hogan & Hartson/Cliffe Dekker