O'Sullivan: Gloves off in Montana war

The foreplay is finally over as the battle for control of Montana Group enters the down-and-dirty litigation phase.

High-priced QCs are polishing their briefs as they prepare for a legal semantics war which will determine whether Lion Nathan's brokers jumped the gun and acquired Montana shares before the time allowed under a stock exchange waiver.

Market players - including a junior market surveillance panel executive who should know better - have been fast to float the drastic penalties Lion could face if a special committee finds it flouted the notice and pause provisions of the exchange's takeover rules.

But you would have to be naive in the extreme to take the line spun by various television and radio commentators that Lion Nathan will have to disgorge its entire 51 per cent control stake in Montana if the committee upholds the original allegations made by British liquor group Allied Domecq in a formal complaint to Montana.

The minority shareholders' champions have had a field day since Lion Nathan grabbed control of Montana from under Allied Domecq's nose.

Allied Domecq's spin merchants have been quick to push the line internationally that their client has been disadvantaged by New Zealand's so-called Wild West sharemarket regime.

There has been outrage and opprobrium from butt-covering cabinet ministers, Montana's independent directors, Allied Domecq and Montana's other significant shareholder, chairman Peter Masfen.

But that is nothing to the international investor furore that would erupt if the stock exchange stripped Lion Nathan of the 28.2 per cent stake it had built in Montana well before Allied Domecq launched its takeover on February 7.

That is the sort of draconian response that would really turn international players off investing in New Zealand companies.

Inevitably, because this is a public relations war as much as a legal war, spin merchants for all the players - Montana, Lion Nathan, Allied Domecq - are fast-feeding the media.

Montana has asked that the committee investigating the allegations include Sir Duncan McMullin, Sir Ian Barker and Bill Wilson, QC, and Lion Nathan says it has no problem with that membership.

Montana says it has received a signed statement from a director of one of its institutional shareholders which stated that a Credit Suisse First Boston broker had telephoned an adviser to that institution at 3.15 pm on Thursday, February 8, asking it to place a sell order with CSFB for its entire Montana stake.

CSFB is said to have commented that the order would need to be placed by 6 pm as Lion Nathan would be processing sell orders at one minute past midnight - "by which time they expected to fill their order," but that the sell order could be withdrawn at any time up to midnight.

The institution placed a sell order with CSFB before 6 pm and Lion Nathan accepted more than 95 per cent of the order, advising the next morning that the balance would have to be sold on market.

What is at issue is whether a transfer of shares took place on Thursday, February 8, notwithstanding the fact that settlement did not take place until the following day and that the offer could be withdrawn at any time before that.

In this affair both Allied Domecq and the Montana Group's independent directors share the view that CSFB's actions amounted to a "restricted transfer" of shares before the expiry of Lion Nathan's pause period at midnight on Thursday, February 8.

Lion Nathan has disputed the claims and said CSFB was not acting as its agent until approximately 2.15 am on the Friday.

With the powerful US investors' Capital Group sitting on a 7 per cent stake in Montana, the reality is that they would have to be pocketed before any deals could be done with other institutional holders.

More than 100 hours of audio tapes will be carefully scrutinised by lawyers acting for all the parties, as well as the special committee to find out if any CSFB advisers effectively brokered sales orders before the midnight deadline.

That issue is not the only one on the special committee's plate. Montana's independent directors have also tried to reopen the debate on the controversial waiver given by the exchange's market surveillance panel which enabled Lion Nathan to get into play in the first place without a two-day stand-down period.

Lion Nathan is bound to oppose that move, but Allied's chief executive, Philip Bowman, will go on the attack publicly if he comes to New Zealand to support the Montana investigation request.

Lion Nathan is not likely to be the only player under the microscope as lawyers for all sides dig in for what may well be a long and costly war.

Go back a fortnight, when British liquor group Allied Domecq was comprehensively outsmarted by Lion Nathan in its first bidding skirmish for control of New Zealand's premier wine company.

Allied Domecq's agents had held discussions with Montana's independent directors and Mr Masfen on a prospective takeover, these discussions dating back to before Christmas in the directors' case.

But in the first flurry of publicity none of this came out as Allied Domecq took the public relations high ground, portraying itself as a white knight for Montana.

The independent directors quickly supported the Allied takeover proposal, which was carefully crafted so that the British company could get the high ground while Lion Nathan was still in its stand-down period.

The directors took the view that Allied's $4.40 bid price was above the range set out by Lion Nathan in a stock exchange notice last November.

The independent directors are not completely disinterested. They each have sizeable shareholdings. Two of them, Barry Neville-White, chairman of the independent directors' committee, and Bryan Mogridge, have had parcels of 500,000 shares. They have been at pains to stress they would not support any takeover offer which did not go to all shareholders on a pro rata basis.

But relations between them and the Lion Nathan camp are now stretched. The directors' decision to ask the panel to pursue the market issues is therefore the only sensible option.

The other issue is market knowledge. It is rare in New Zealand commercial life to find a Chinese wall that a grapevine cannot grow over. Most players are careful to manage their conflicts of interest and many companies rigorously police their internal rules which govern when insiders can trade.

But when an international takeover is in the offing the Chinese walls get even harder to police. The Lion Nathan camp has its own concerns on this score and may yet add its own fuel to the Montana fire.

The Lion strategy team faces a tough choice: whether to escalate the conflict this week or sit back, deny the allegations and take a magisterial approach as the panel makes its deliberations.

My betting is that the Lion will roar.