On December 22, 2000, Luscar Ltd. (Luscar), Canada’s largest coal producer, announced a settlement with nine former executives (the Executives) of Manalta Coal Ltd. (Manalta) for $10.9 million, in addition to a previous payment of $1.8 million. The litigation arose over the compensation and severance packages the Executives were to receive upon their release from Manalta following a hostile takeover of the Manalta Coal Income Trust (Manalta Trust) by the Luscar Coal Income Fund (the Luscar Fund) in September 1998.
Prior to the takeover, Manalta was for many years a private company which was sold to the Manalta Trust through an IPO in 1997. When the company went public, formal Employment Agreements were put in place with the Manalta Executives which contained, inter alia, a provision which allowed the executives to resign and obtain their full severance benefits on a change of control in the company.
When the Luscar Fund launched a hostile takeover bid for the Manalta Trust in 1998, a Special Committee of outside directors was immediately put in place and undertook the typical defensive tactics. On the advice of counsel and the company’s financial advisors, the Special Committee of the Manalta Board offered the Manalta Executives a retention bonus in order to secure their employment beyond a change of control. Luscar was ultimately successful and after completing the takeover, obtained an exparte injunction preventing the Executives from obtaining their severance and retention bonus payments, all of which had been secured by Retirement Compensation Agreements. Luscar also issued a Statement of Claim against the Executives and all of the Manalta Directors alleging conspiracy and breach of fiduciary duty with respect to the Employment Agreements and the Retention Bonus Agreements, and summarily dismissed the Manalta Executives.
Luscar alleged in its Statement of Claim that the Employment Agreements over-compensated the Manalta Executives and were therefore unenforceable. Luscar also alleged that the Retention Bonus Agreements were unnecessary, and therefore void for lack of consideration, and were entered into with the sole purpose of injuring Manalta so as to injure Luscar after its takeover, and were in any event not fair and reasonable to the corporation. The Executives counterclaimed for $21.9 million, being the amounts owing to them under their Employment Agreements and Retention Bonus Agreements, sought the payment of a “disposition fee” under the terms of a Management Agreement between Manalta Management Corp. and Manalta and made an oppression claim against Gordon Ulrich, Luscar’s CEO.
David R. Haigh, Q.C. and Mike Donaldson of Burnet, Duckworth & Palmer LLP acted for the Executives. Leslie R. Duncan, Q.C. of Duncan McCachen Code acted for the Manalta Directors. Rick Davison, Q.C. and David Rolf of Parlee McLaws acted for Luscar and Cliff O’Brien, Q.C. of Bennett Jones LLP acted for Gordon Ulrich. Ray Rutman of Fraser Milner Casgrain LLP acted for the Royal Bank of Canada and Royal Trust, the Trustee under the Retirement Compensation Agreements.