March/April 2009

Takeover terminated

Ontario Superior Court halts the attempted annexation of Gold Reserve

By R. Bergen

Evidence of a conflict of interest and breach of confidence were enough to convince an Ontario Superior Court judge in February that Vancouver-based Rusoro Mining’s attempted hostile takeover of Gold Reserve had to stop.

During the summer and fall of last year, Rusoro’s attempts to purchase and later to become involved in Gold Reserve’s operations in the Venezuelan state of Bolivar were rebuffed by the company.

The takeover bid was launched in December, last year. Gold Reserve shareholders were offered three Rusoro shares for every Gold Reserve share they owned. Spokane, Washington-based Gold Reserve immediately cried foul and asked for an injunction to stop the process until it could be scrutinized by the court. Gold Reserve president, Douglas Belanger, said waiting for a formal trial was not an option. If Gold Reserve’s shareholders accepted the offer and only learned after the takeover was completed that the bidder had an unfair advantage in negotiating the deal, the damage could not have been undone, said Belanger.

Gold Reserve’s objection to the deal sprung from the involvement of Endeavour Financial Corporation. The company, working with Rusoro in its takeover bid, had received $1.2 million over the last four years from Gold Reserve in exchange for financial advice and help in raising capital for its operation. Endeavour was bound to act in the best interests of Gold Reserve and notify the company if any apparent conflicts of interest arose.

In his decision, Justice Peter Cumming noted that Endeavour employees were working for both Rusoro and Gold Reserve at the same time. He pointedly criticized an Endeavour employee and lawyer for ignoring the terms of the contract with Gold Reserve that he, himself, had drafted.

Endeavour ended its association with Gold Reserve the same day the takeover bid became public. Cumming, however, pointed out that the relationship was intact as the financial company helped put Rusoro’s bid together. At the time, Endeavour had access to comprehensive details about Gold Reserve’s concessions, including operational records, as well as geological analyses and data.

The judge was blunt in his response to Endeavour’s claim that, though it did not have “institutionalized ethical walls” to protect confidential information, it had not compromised Gold Reserve. “The defendants’ argument that their officers and employees can compartmentalize their minds so as to segregate and not use the confidential information given to them in the past lacks reality,” he declared.

Justice Cumming did not spare Rusoro. He criticized the company for drilling in neighbouring Gold Reserve’s concession. Rusoro did not share the results until the legal process began. Cumming said that although this trespass did not relate directly to the case, “the incident is perhaps more generally indicative of the approach of Rusoro in its business dealings.”

Shortly after the judge issued the injunction preventing the takeover without a trial, Rusoro killed its bid. However, Rusoro, along with Endeavour, wants permission from the court to appeal the judge’s decision.

Regardless of the recent court decision, the immediate future for Gold Reserve’s “shovel-ready” concession Las Brisas remains uncertain. Last May, the Venezuelan government cancelled Gold Reserve’s construction permit for the site. Belanger said the country’s mining authorities have not clarified what needs to be addressed before construction can go ahead, and that uncertainty is general in the industry.

“Government officials are saying they have the desire to increase their interest in mining much as they did in the oil business, but they haven’t laid out a program to do so,” said Belanger. “Everybody is sort of in limbo.” He added that Canadian companies with concessions in the area have firm legal footing and a clear path to follow. “Crystallex has given notice of a potential arbitration claim under the Canadian Bilateral Investment Treaty and we have indicated that if we can’t get clarification that we would probably seek a similar route.”

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