Lawsuit may delay takeover — Inco shareholders give nod to Voisey’s Bay

Lawyers working for Inco (TSE) are reviewing a lawsuit which could stall, if not stop, the company’s imminent takeover of Diamond Fields Resources (TSE).

Shareholders of Diamond Fields Resources (DFR) voted 99.9% in favor of the Inco takeover at their May 22 annual meeting in Vancouver, B.C., while 98% of Inco shareholders approved the resolutions regarding both the creation of the VBN shares (which will allow former DFR shareholders to retain a 25% interest in the huge Voisey’s Bay nickel-copper-cobalt project) and the inclusion of DFR executives Edward Mercaldo and Jean-Raymond Boulle on the Inco board.

At Inco’s annual meeting in Toronto, a handful of the shareholders present indicated their concern regarding the DFR deal; some of them voted against the relevant resolutions.

One shareholder expressed concern that DFR’s clear title to the Voisey’s Bay nickel-copper-cobalt deposit had been challenged by three “very hungry” American lawyers representing four shareholders of Texas-based Exdiam, and warned that, until the matter is cleared up, it would be “very unwise” to buy DFR.

The Exdiam lawsuit relates to an investment in an Arkansas diamond project in which DFR Co-chairman Boulle was one of several partners. The plaintiffs allege that Boulle breached his fiduciary responsibility to Exdiam by selling certain interests to outside partners, namely DFR. They seek unspecified damages.

The only reference to Exdiam found in DFR’s 1993 statement of material facts relates to a transaction where it acquired an interest in six state of Minnesota leases in return for 200,000 common shares. DFR acquired its 60% interest from a private company held by DFR Co-chairman Robert Friedland. The other 40% was owned by Exdiam, in which Boulle held a minority interest of 23.5%. Some limited exploration was carried out by Exdiam and Friedland’s company, which resulted in some anomalies being defined as “potentially” kimberlites. DFR did not explore this property, and, at the time of the report, stated it did not plan to carry out any work on the leases.

In a release, Diamond Fields stated the lawsuit was “an opportunistic attack [issued] in a blatant attempt to coerce an unmerited financial settlement.” While telling shareholders (and, later, reporters) that little could be said about such a sensitive legal matter, Inco Chairman Michael Sopko did say that Inco’s board has been reviewing all aspects of the

suit with its outside counsel, and with DFR’s counsel. He noted that the agreement between Inco and DFR provides that Inco’s obligation to complete the acquisition is subject to certain conditions; the resolution of DFR’s ownership of Voisey’s Bay is one such condition.

“Inco does not intend to proceed with the transaction until it is satisfied that this litigation will not change our view that the acquisition is in the best interest of the company,” he told shareholders.

Inco’s acquisition of DFR is scheduled to close May 29. After Aug. 31, either party may back out of the deal. If the deal does not proceed, Boulle and Mercaldo will resign from Inco’s board.

$4.5-billion package

Inco’s bid for DFR, offered in late March, would see DFR shareholders receive 0.557 of an Inco common share per DFR share (or the equivalent, in cash, of up to an aggregate maximum of $350 million), along with 0.091 of an Inco Series E Convertible Redeemable Preferred Share, 0.25 of an Inco Class VBN share and one note that would be paid in one share of Diamond Fields International (which will comprise all of DFR’s diamond assets). The total package is worth about $4.5 billion, or $43.50 per DFR share.

Sopko said Inco could be producing concentrate at Voisey’s Bay by the end of 1998, and could reach full production levels of 270 million lb. nickel and 200 million lb. copper by 2000. However, in response to shareholder concerns about the continued viability of Inco’s operations in Sudbury, Ont., and Thompson, Man., he said: “We are not buying Diamond Fields to shut down Sudbury and Thompson.”

Meanwhile, representatives of Labrador’s Inuit and Innu peoples were passing out literature at Inco’s meeting. One shareholder asked Sopko to freeze development of the Voisey’s Bay project until all native land claims are resolved and a “full-scale, single, comprehensive environmental review” of the Voisey’s Bay project is completed. Sopko responded by noting that until the acquisition of DFR is complete, Inco has only a minority interest in Voisey’s Bay, and has yet to be part of any land claim negotiations with the Inuit and Innu.