On December 7, 2009, Justice Frank Newbould of the Ontario Superior Court of Justice (Commercial List) dismissed the application of Computershare Trust Company as trustee for the holders of Crystallex International Corporation's $100-million senior unsecured notes (the Noteholders). The court's ruling in Computershare Trust Company of Canada v. Crystallex International Corporation, 2009 CarswellOnt 7997, is currently under appeal at the Ontario Court of Appeal.
The case arose out of the Venezuelan government's failure to issue Crystallex an environmental permit that it required to begin excavating gold from Las Cristinas, a property covering approximately 9,600 acres and containing 20.76 million ounces of gold in Bolivar State, Venezuela. Crystallex obtained an interest in Las Cristinas through a Mine Operating Contract (the MOC) with the wholly owned Venezuelan government corporation, Corporación Venezolana de Guayana. Crystallex's principal asset is its interest in Las Cristinas, and the MOC grants Crystallex exclusive rights to develop and mine the gold deposits on the Las Cristinas property.
On April 14, 2008, a Venezuelan government official denied Crystallex's application for the environmental permit. In 2008 and 2009, Venezuelan government officials made various public statements threatening to take back the Las Cristinas property from Crystallex.
The first issue before the court was whether a Project Change of Control as defined in the Noteholders' indenture had occurred, which would require Crystallex to purchase the notes at a price of 102 per cent of par value plus accrued interest. The indenture defined Project Change of Control as “the occurrence of any transaction as a result of which the Corporation ceases to beneficially own, directly or indirectly, at least a majority interest in the Las Cristinas assets.” The Noteholders contended that a transaction had occurred because: (a) the Venezuelan government had denied Crystallex the environmental permit; and (b) the Venezuelan government had effectively expropriated Crystallex's interests by way of statements of various Venezuelan government officials threatening to “take back” Las Cristinas. They argued further that Crystallex had lost beneficial ownership of the Las Cristinas assets, namely the CVG contract.
The second issue before the court was whether Crystallex had breached the covenant in the Noteholders' indenture that required Crystallex to use the net proceeds of the notes to fund the development of the Las Cristinas project. Crystallex had used some of the proceeds of the Notes to purchase mining equipment for the project. After Crystallex sold some of that equipment, the Noteholders argued that the proceeds of the sale had not been used to develop the Las Cristinas project and thus Crystallex was in breach of the covenant, meaning that it was in default of the trust indenture and would be required to repay the principal and any outstanding interest on the notes immediately. The court found that the Noteholders had failed to establish that any of the relevant portions of the money from the equipment sales had not or would not be spent on the development of the Las Cristinas project. The court further held that it was not willing to imply an additional term in the trust indenture that would prevent Crystallex from selling the equipment that it did.
The third issue before the court was whether Crystallex had acted in an oppressive manner in the way in which it reacted to the failure of the environmental permit being issued. The Noteholders argued that they had a reasonable expectation that, after pursuing the permit issuance and an unsuccessful appeal, Crystallex would stop pursuing the project, would liquidate its assets and pay off the notes. The court found that the Noteholders had failed to establish a reasonable expectation that Crystallex would do anything in particular, including doing what the Noteholders contended should be done.
The court noted that the prospectus language and general public information available at the time the notes were issued provided ample warning regarding the situation the Noteholders complained of, and could not have been taken to create a reasonable expectation as to what Crystallex would do if faced with a delay or denial of a necessary permit. The court also found that the Indenture could have but failed to include protection against these risks. The court further held that the Crystallex directors acted in an informed and reasonable manner, thereby obtaining the protection of the business judgment rule over their decisions.
Crystallex was represented by Markus Koehnen, Amanda Klein, Brad Hanna, Robert Wisner and Brett Harrison of McMillan LLP.
The Noteholders were represented by Robert Staley, Derek J. Bell and Gavin Finlayson, Emrys Davis and Mark Smyth of Bennett Jones LLP. Terrence O'Sullivan and Ashley Lattal of Lax O'Sullivan Scott LLP had represented the directors at an earlier stage of the proceedings when the Noteholders sought leave to have Crystallex commence a derivative action against them.