Forbes Coal (now Buffalo Coal) operations in Dundee, South Africa. Buffalo Coal is one of Aberdeen International Inc’s portfolio investment companies.Supplied
The battle over lavish insider payments and governance practices at a struggling mining company managed by Toronto financier Stan Bharti is going to court.
Justice Herman Wilton-Siegel of the Commercial List division of the Ontario Superior Court of Justice agreed Wednesday to hear an application by San Francisco-based activist Ryan Morris to block a private placement of stock and $11.3-million in potential payments to five insiders, including a company controlled by Mr. Bharti's family, at Aberdeen International Inc.
An application filed with the court Monday by Mr. Morris's fund Meson Capital Partners and Aberdeen shareholder Nightscape Capital of Britain alleged the potential payments would be "oppressive" transfers of shareholder value that "unjustly enrich the insiders." Meson and Nightscape last month requisitioned a shareholder vote, set for February, to replace Aberdeen's directors. Meson and Nightscape are Aberdeen's largest shareholders, with a combined stake of 9 per cent.
Aberdeen has not filed a response to the legal challenge and a spokesman declined comment. In a news release Wednesday, the company criticized its dissident shareholders for conducting a "smear campaign" and pursuing a "self-interested agenda." The statement praised the "strong leadership and experience" of its board.
One of Aberdeen's directors, former Liberal cabinet minister Pierre Pettigrew, resigned last month amid complaints from Mr. Morris about what he described as generously priced private placement of stock units.
According to court documents, Aberdeen has hired the law firm Norton Rose Fulbright LLP to advise a special committee of directors about the legal challenge. A court hearing has been set for Jan. 21.
Aberdeen is one of nearly two dozen junior mining companies that pay consulting and other fees to Forbes & Manhattan, a private Toronto company controlled by Mr. Bharti's family, in exchange for management, financing and other services.
"Mr. Bharti, using his company, Forbes & Manhattan Inc. as his vehicle, has consistently followed a pattern of enriching himself and his close allies at the direct expense of Canadian retail investors," Mr. Morris alleged in his court filing.
During the commodity boom, Forbes & Manhattan attracted mostly retail investors to invest in startup ventures in struggling countries such as Kurdistan and Ethiopia with the help of prominent advisers who gave speeches or attended its investment summits. Advisers and directors include retired CNN talk-show host Larry King, Mr. Pettigrew, Canada's former ambassador to Iran Ken Taylor and retired Canadian major-general Lewis Mackenzie.
Slumping mineral prices and growing losses at a number of ventures managed by Forbes & Manhattan have prompted shareholders to question rich payments to Mr. Bharti and other corporate insiders. Aberdeen, for example, saw its net loss rise to $16.6-million in the nine months ended Oct. 31, 2014, an increase of 17 per cent from a year earlier. Its stock price has plunged from a high of $1.02 in 2011 to 15 cents a share at Thursday's close on the Toronto Stock Exchange.
Mr. Morris's challenge marks the third time in two years that shareholders have challenged insider payments or governance practises at a Forbes & Manhattan company.
The previous two contests, involving shareholder-led proxy fights at Dacha Strategic Minerals Inc. and Longford Energy Inc., saw new directors appointed. This week's move by Mr. Morris and Nightscape Capital marks the first time Forbes & Manhattan's governance practices have been challenged in court.
At the heart of the legal contest is the investors' complaint that Mr Bharti's family company Forbes & Manhattan and four Aberdeen executives would be eligible under management contracts to receive $11.3-million in change-of-control payments if the company completes a proposed sale of the bulk of its assets to Landmark Equity, a U.S. private equity firm. The change-of-control payments amount to more than a third of the $29-million in proceeds Aberdeen would receive for the assets.
The investors are also seeking to suspend the voting rights of 10 million recently issued shares and warrants ahead of the February proxy vote on a dissident slate of directors. The share units were privately sold in November and at the time Aberdeen said only 19 per cent of the shares were purchased by insiders.
This week's court filing by the dissident investors alleges virtually all of the 10 million shares were purchased by Mr. Bharti, other Aberdeen officials, an affiliated company called Sulliden Mining and a numbered Ontario company that shares the same mailing address as Aberdeen and other affiliates.