Judge Delivers Hammer Blow To JP Morgan Down Under
By: Ainsley Brown
Judge David Hammerschlag – German for hammer blow – does just that, delivers a hammer blow to the investment bank JP Morgan.
In the case of JP Morgan Australia Limited v. Consolidated Minerals Limited, Judge Hammer Blow , sorry I just couldn’t resist, I mean Judge Hammerschlag has ruled that the fees the bank charged Consolidated Minerals (ConMin) in the latter’s sales were “capricious, unreasonable and unjust.” Before I go any further I need to make a bit of a confession. In a previous post I accused the lawyers from ConMin of being either arrogant or capitulant in their decision not to call any witnesses or submit any documents to support the defense of their client. I was wrong, it was a brilliant move. In not having any witnesses or documents the lawyers avoided any potentially awkward or damaging moments in the public specter know as the courtroom. In so doing they effectively managed the ConMin brand and for that I Salute You!
The case, followed very closely by those in the investment banking community, has helped but not totally shined the spotlight on the fees investment banks charge during mergers and accusations, namely on their defense response fees. Defense response fees are basically the fees a bank would charge its client to ward off an unwelcomed takeover bid by for instance soliciting a rival bid.
Before ConMin was sold to Palmary Enterprises with its A$1.3 billion share cash offer a three way bidding war ensued between Palmary, Territory Resources and Pallinghurst which drove up the market value of ConMin. It is this rise in value that is at the centre of JP Morgan’s claim to compensation. The bank believed that its incentive, including its defense response fee ought to be based on the difference between the first take over bid which was made by Pallinghurst and the final and wining offer from Palmary. The judge however did not see it that way, according to Judge Hammerschlag as it pertain to the rival bids “there was no need for either of them to be repelled or warded off.” Thus, JP Morgan’s fees ought to be based on the difference between Palmary’s first and winning offer.
What does this mean for JP Morgan?
It means that it will just have to be satisfied with the A$20 million that ConMin has already paid it. However, this may not be the end of this story for these two; the ruling is subject to appeal by the bank.
What does this mean for investment banks?
Investment banks will certainly be paying closer scrutiny to the language in their fees structure, namely with respect to incentive and defense response fees. I suspect that banks will seek/impose greater clarity in to the murky world of what they actually do vs. what eventually happens in takeovers. Additional, I also suspect that investment bank will be facing more and tougher questions from their clients who will want fees explained and justified.
