Re: Opting in
in response to
by
posted on
Mar 28, 2017 08:03AM
Crystallex International Corporation is a Canadian-based gold company with a successful record of developing and operating gold mines in Venezuela and elsewhere in South America
Ahh that'd be Reyes. For those that missed that one, see below or go to the Full version.
It is odd that he went over to the dark side by opposing the opt-in. Paau are you Juan Antonio Reyes?
REDACTED VERSION
Court File No. CV-11-9532-00CL
ONTARIO
SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, 1985, c.C-36 AS AMENDED
AND IN THE MATIER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CRYSTALLEX INTERNATIONAL CORPORATION
(the "Applicant")
AFFIDAVIT OF JUAN ANTONIO REYES
(sworn April2, 2012)
I, JUAN ANTONIO REYES, of the City ofToronto, in the Province of Ontario, MAKE OATH AND SAY:
1 I am personally a shareholder of Crystallex International Corporation ("Crystallex" or the "Company") and have on behalf of my children also purchased shares of Crystallex, as set out in more detail below. As such, I have personal knowledge of the matters to which I hereinafter depose. Where I do not possess personal knowledge, I have stated the source of my information and, in all such cases, believe it to be true.
2 Other than the shareholdings set out below, I do not have any financial interest in
Crystallex or in the outcome of these proceedings. The same is true for my children.
3 The Bank of Canada website reflects that the U.S. dollar was valued slightly under Canadian dollar as of close on March 30, 2012 (1 U.S. dollar being equivalent to .9975 Canadian dollars). To avoid constant conversion, and given this relative parity in currencies, I have not distinguished in this affidavit between Canadian and U.S. dollars.
Purpose of this Affidavit
4 Management of Crystallex is seeking approval of a management incentive program (the "MIP") on April 5, 2012. The Company has produced evidence of U.S. Chapter 11 cases wherein management has been awarded ten percent (10%) of equity, and this evidence suggests that this compensation standard is a "fair proxy" that ought to be applied in the case of Crystallex.
5 Certain noteholders have filed evidence to the effect that the compensation standard for management incentive programs in Canada is much lower.
6 The MIP is structured in such a way that management will receive secured debt, not equity, and will by the end of this week (assuming approval of the debtor-in-possession financing and the MIP in current forms) hold value equivalent to between 18.2% and 23.1% of the value remaining for existing shareholders of the Company. This result is far in excess of either of the above-noted compensation standards.
Notice to Shareholders
7 I became aware of the Company's "MIP Approval Motion" as a result of reviewing the website of Ernst & Young Inc. maintained by it in its capacity as Monitor herein.
8 I subsequently reviewed the SEDAR website to determine what press releases or other materials the Company had made available in Canada through public filings. The materials available on SEDAR as of April 1, 2012 included a Material Change Report dated March 16,
2012 that refers to the immediate adoption by Crystallex of a new shareholder rights plan, and also refers to the anticipated delay in filing annual audited financial statements and other annual
disclosure documents. A copy of that Material Change Report, together with the two related press releases issued by the Company, are collectively attached as Exhibit "A".
9 Also available on the SEDAR website as of April 1, 2012 was a press release dated March 21, 2012, entitled "Crystallex Executes Commitment Letter for DIP Financing" wherein the Company advises that it has entered into a commitment letter for debtor-in-possession financing, and that "A hearing before the Court has been scheduled for April 5, 2012 to approve the financing evidenced by the Commitment Letter". There is no mention of the MIP or the motion for the approval of the MIP (the "MIP Approval Motion") which has also been scheduled for April 5, 2012. A copy of the March 21, 2012 press release is attached as Exhibit "B". I note that the press release does indicate that information with respect to "other matters" is available on the Company's website and the Monitor's website.
10 On April 1, 2012, I also checked the Company's website at www.crystallex.com, under the links to "News", "Press Releases" and "Events'', and found no mention of the MIP or the MIP Approval Motion.
11 On Friday, March 30th, Mr. Porter of Thornton Grout Finnigan LLP served a Notice of Appearance on behalf of me and my children. Until that time, there were no shareholders qua shareholders on the Service List.
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1 Affidavit of Robert Fung sworn December 22, 2011.at paragraph 37
13 I have been a shareholder of Crystallex for approximately nine years. I have invested in shares of Crystallex on behalf of myself and my children. Below is a chart of our current investments in Crystallex, indicating the investor name, the type of account, the number of the shares in such accounts, the amounts paid for these shares, and the current trading values of those shares, based on the March 30, 2012 closing price of $.14 for such shares (symbol CRYFQ.PK,
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Savings Plan
14 The earlier of these investments were in my RRSP, my RESP, and in my children's accounts, and the impact of share depreciation in those accounts has been dramatic, as set out above. Over the last few years, I have 'averaged down' our losses (in percentage terms) by acquiring a large number of Crystallex shares in a non-registered account - the last of the accounts listed above. Unfortunately, this has (in absolute terms) only increased our losses.
15 While it is unfortunate that Crystallex finds itself in CCAA proceedings, it does appear to me to have been a necessary step in the circumstances, to protect the interest of various Crystallex stakeholders, including shareholders. Mr. Fung has stated that the Company has
invested over $500,000,000 in attempting to develop the Las Cristinas gold mine in Venezuela.2
Approximately $100,000,000 was raised by the bond offering described in many of the materials filed herein.
16 The materials filed in these proceedings reveal that Crystallex does not have material secured creditors, whom if present might have foreclosure or other contractual and statutory rights giving them a direct interest in the assets of Crystallex. Crystallex appears to have sole ownership and control of its assets, including specifically its interest in the Las Cristinas project in Venezuela and its corresponding interest in the international arbitration commenced by Crystallex with respect to that project (the "Arbitration"). Unsecured creditors and shareholders, neither of whom have a direct interest in the assets of Crystallex, are both substantial stakeholders.
17 The value of Crystallex' assets appears uncertain at this time, and could range from nil to
$3.8 billion, the latter being the amount of the arbitration claim advanced by Crystallex. In his December 22, 2011 affidavit, at paragraphs 26 to 28, Mr. Fung stated his view that Crystallex will recover more than its $500 million investment in the Las Cristinas project:
Crystallex's damage claim is for $3.8 billion.... Crystallex has spent over $500 million on the project. In the unlikely event that Crystallex got back only what it put into the
2 Affidavit of Robert Fung sworn December 22, 2011, at para. 27
project, without interest and without any compensation for the loss of the ability to develop the project, Crystallex would still have more than enough to pay all of its debts and have substantial value left over for shareholders.... Venezuela has a history of settling arbitrations or honouring arbitration awards.
18 The materials filed in these proceedings also reveal that Crystallex and certain unsecured noteholders (the "Noteholders", being those represented by Computershare Trust Company of Canada) are in substantial disagreement over the nature, sequence and timing of events. Crystallex has described the Noteholders as claiming that the economic interest in Crystallex belongs to them, and that the Noteholders are claiming to be "entitled to more than their full principal and interest".3 Crystallex is of the view that it can prosecute the arbitration claim far
more effectively than the Noteholders can,4 and that Crystallex should be permitted to proceed to
complete the arbitration process in order to recover value for all stakeholders of Crystallex, including its shareholders.
19 As a shareholder of Crystallex, I support management's efforts to preserve value within Crystallex for all stakeholders, including both unsecured creditors and shareholders, and management's efforts to maintain some balance between the rights of unsecured creditors and the rights of shareholders, both of whom have legitimate interests and both of whom could receive substantial value from the Arbitration proceedings. Given the aggressive assertion of rights by the Noteholders to date, and given the absence of representative counsel or an organized presence by Crystallex' shareholders to date, Crystallex' directors and officers have had an obligation to be equally assertive in defending shareholder interests.
3 Affidavit of Robert Fung sworn March 20, 2012, at paras. 5 and 6.
4 Affidavit of Robert Fung sworn March 20, 2012, at para. 9.
20 To ensure that shareholders' interests continue to be defended in the current proceedings, particularly given the participation of aggressive and well-represented unsecured creditors, I believe that it is important that the economic interest of Crystallex' management should continue to be aligned with the interests of shareholders, if not completely, then in large measure.
21 I have some concerns with respect to the structure of the proposed MIP, since in my view it will distance management from shareholders, and upset this balance. In addition, for the reasons stated below, I believe that the structure of the MIP confers upon management an interest substantially larger than the '10% equity interest' referred to in some of the materials.
Current Compensation levels and outstanding Stock Options
22 Currently, management of Crystallex appears to have the benefit of several forms of compensation that, in general terms, aligns their interests with the interests of shareholders. These forms of compensation include (i) salaries, (ii) cash bonuses, and (iii) stock options.
23 The names of some of the beneficiaries of the MIP have been redacted in the Company's motion materials. However, the named beneficiaries continue to receive substantial salaries, as indicated in the letter from Mr. Swartz contained in Motion Record filed by the Company in support of the MIP Approval Motion (the "MIP Approval Motion Record").
24 Attached as Exhibit "C" is the most recent publicly available audited financial statements of Crystallex (the "Financial Statements"), for the nine months ended September 30, 2011. At page 31 of the Financial Statements, there is a description of the aggregate compensation to directors and senior management team for that nine month period, being $2,025,000 (including
$1,563,000 in salaries and short-term employee benefits, and $423,000 in directors' fees paid in cash ($361,000) and in shares ($62,000)).
25 In addition, and as described at page 26 of the Financial Statements, stock options have been granted by the Company to acquire 21,862,000 common shares of Crystallex. Those stock options include options with the following pricing and in the following amounts (as listed below, the "Stock Options"). I note that there are stock options available, in addition to those noted
below, but at significantly higher exercise prices.
I Exercise Price I Number of Options |
Remaining life (years) ! |
|
. $0.10 I |
3,880,000 |
8.38 |
I $0.24 |
6,175,000 |
5.69 |
$0.45 |
4,903,000 |
6.94 i |
26 The total number of the above-listed Stock Options is 14,958,000. As noted in the
Financial Statements at page 23, there were, as of September 30, 2011, approximately
365,000,000 issued common shares ofCrystallex. Accordingly, these Stock Options if exercised would represent approximately four percent (4%) of the issued equity of the Company.
The Need for the MIP
27 I do not disagree with the Company's position that the MIP will assist in retaining certain management personnel in order to prosecute the Arbitration. Perhaps more importantly, a properly-structured MIP will provide an incentive to management to be particularly diligent in advancing the Company's interests. Although I am not aware of the full slate of proposed
beneficiaries of the MIP (due to redactions in the Company's materials), I do not disagree with rewarding the persons named in the Company's public materials, including Mr. Marshall, who in my personal experience has been a valuable point of contact and source of information for investors.
28 I disagree with statement in paragraph 8 of Mr. J ohan van't HoPs affidavit sworn March
21, 2012, to the effect that "In the absence of an otherwise operating business, the employees in question would ordinarily be expected to leave Crystallex". Crystallex has not been an operating business for some years now (in the sense of operating a mine or other operational asset), and as the Company's materials disclose, Mr. Fung has been involved with Crystallex since 1997, Mr. Oppenheimer since 1995, and Mr. Crombie since 2002. I don't know when Mr. Marshall joined Crystallex, but I do know that it was also several years ago.
29 I am unaware of the identity of the other proposed beneficiaries, and therefore have no views as to the need to provide an incentive to them by way of a MIP.
The Structure of the MIP distances Management from Shareholders
30 I am concerned that the structure of the MIP distances management from the interests of the shareholders of Crystallex, and will therefore upset the 'balance' that I have referred to in paragraphs 19 and 20 above.
31 The MIP, if approved and implemented in the form put forward by Crystallex, would not give management a 10% 'equity interest', as described below, but rather would give management a direct, secured interest in the main asset of Crystal/ex, being the proceeds of the Arbitration.
32 It is my view that the MIP ought to be structured in such a way that management is aligned with and awarded in the same manner and at the same time as shareholders. Such an alignment would also protect the creditors of Crystallex, since the shareholders of Crystallex will not receive any benefit until all of the creditors of the Company have been repaid in full.
33 If, on the contrary, management is now aligned as a secured creditor ofthe Company, it will have a greatly reduced financial interest in protecting shareholder value, which to date has been the stated reason for many of its actions, including the commencement of these proceedings.
The Quantum of the MIP
34 In its MIP Approval Motion Record, the Company includes "Discussion Materials" prepared by Skatoff & Company, LLC ("Skatoff'), wherein Skatoff summarizes 20 U.S. Chapter
11 outcomes and states:
• Our analysis reflects the following:
In all cases, any pre-existing management equity incentive plans were extinguished
In the 19 cases where pool size was specified, mean and median allocations of reorganized common stock for management equity incentive plans of 10.2% and 10.0%, respectively
35 The Skatoff Discussion Materials are relied upon by Crystallex management as setting a "fair proxy for a MIP". In paragraph 33 of Mr. van't Hofs affidavit, he states "The [SkatoffJ table indicates a market norm of share options equal to 10% of the company upon an exit from Chapter 11 proceedings in the United States. Given that Crystallex is likely to be liquidated after receipt of the total reward, it was thought that this amounted to a fair proxy for a MIP".
36 As noted above, the MIP does not purport to grant "common stock for management" nor "share options equal to 10% of the company". Rather, the structure of the MIP grants management an immediate 10% secured creditor interest in the net proceeds of the Arbitration. The financial and legal differences are notable, as I attempt to illustrate below.
37 As I understand the structure of the debtor-in-possession financing and the MIP, if each of these were approved in their current forms on Thursday of this week, management would thereupon have acquired value equal to between 18.2% and 23.1% of the outstanding equity of the company, far in excess of the compensation standard referred to above.
38 Before moving to that discussion, I note that the Noteholders have provided evidence as to what they consider to be the appropriate levels of management incentives in Canada in the CCAA context, and that those levels are lower than what Mr. Skatoffhas put forward.
39 As a shareholder, I would not oppose a MIP that granted Crystallex' management the equivalent of 10% of the currently issued common shares of the Company - that is, reward management as though they hold approximately 40,500,000 currently issued common shares.5 I realize that this could result in very substantial payments to management (even at the current trading price, this would represent a value of approximately $5,600,000), but in my view a MIP structured in this fashion would help to assure that management makes every effort to protect all stakeholders of Crystallex, including its shareholders.
5 365,000,000 currently issued shares plus 40,500,000 MIP (notionally-issued) shares would total405,500,000
Clarification regarding Outstanding Equity-based Compensation
40 As I have noted above, the currently outstanding Stock Options represent rights to acquire approximately four percent (4%) of the outstanding common stock of the Company. If these Stock Options are and remain available to management, then under the MIP it would not only receive a secured creditor interest in 10% of the net proceeds of the Arbitration, but it would also retain the benefit of the Stock Options.
41 In the excerpt from the SkatoffDiscussion Materials reproduced above, Skatoffs analysis reflected that "In all cases, any pre-existing management equity incentive plans were extinguished". As well, in the letter from Mr. Swartz contained in the Company's MIP Approval Motion Record, Mr. Swartz states that in arriving at his conclusions, he placed considerable weight on certain factors, including that "The Bonus Pool replaces existing bonus or incentive compensation".
42 It is not clear that the MIP will replace and therefore cancel the Stock Options, or if these will remain for the benefit of management, in addition to the MIP. As well, it is not clear whether management could seek additional stock options in the future. On March 27, 2012, I called Company's counsel to ask for clarification in this regard. l have not yet received that clarification.
The effect of the current MIP
43 To illustrate the effect of the MIP, as I understand it, I have prepared the following simplified table, applying the sequence of payments proposed by the Company, and based on the following facts and assumptions: (a) Crystallex has approximately $110,000,000 in unsecured
debt, which will accrue interest at approximately 10% per year, (b) the debtor-in-possession financing is approved, the full amount of the debtor-in-possession financing is advanced, and it also accrues interest at 10% per year, (c) Crystallex will proceed to a settlement or completion of the Arbitration, and (d) Crystallex will pay its Arbitration expenses and other expenses on a current basis. The assumptions included in the tables are for illustrative purposes only.
44 For the purposes of the table in this paragraph below, I have assumed that Crystallex will recover only its investment in Las Cristinas (that is, $500,000,000), and would not have tax to pay on the recovery of its investments. The amounts referred to in this table are dollars.
DIP Lender (secured debt) |
Unsecured Creditors |
DIP Lender (Additional Compen- sation) |
Management (MIP) |
Net arbitration proceeds available to Company ("NAP") |
Stock Options (4% of NAP) |
Existing shareholders (96% of NAP) |
I |
I
I Notional Values if Arbitration proceeds received today:
Nil 110,000,000 ·Nil . Nil 390,000,000 15,600,000 374,400,000
Notional Values if Arbitration proceeds received after April 5th (assuming approval of DIP and
MIP in current form):
36,000,000 110,000,000 123,900,000 35,400,000 194,700,000 7,788,000 186,912,000
Notional Values assuming arbitration proceeds are received in one year:
I
39,600,000 1121,000,000 1118,790,000 133,940,000 1186,670,000 17,466,800 : 179,203,200 i
Notional Values assuming arbitration proceeds are received in two years:
43,600,000 1133,100,000 1113,155,000 132,330,000 1177,815,000 l7,112,600 1170,702,400 i
45 As this table illustrates, the structure of the MIP in its current form (assuming the approval of the debtor-in-possession financing and the MIP in the current forms) could actually result in management holding value equivalent to $43,188,000 or 23.1% of the value available to equity holders, by the end of this week. 23.1% is arrived at by adding (from the second row of numbers above) $35,400,000 MIP value plus $7,788,000 (the notional value of the Stock Options) and dividing the sum of those two amounts by the remaining notional value available to existing shareholders ($186,912,000).
46 This result would be far in excess of the compensation standards cited by either the
Company or the Noteholders.
47 I note that not all of the Stock Options may be available to the proposed beneficiaries of the MIP, and that one of course has to pay the exercise price of the Stock Option in acquiring the related shares. These factors would have some impact on the foregoing calculations.
48 Finally, as noted above, it may be that the Company intends to cancel the Stock Options, although this is not provided for in the MIP. Even if that were the case, again utilizing the numbers in the second row of numbers in the table above, this could result in management holding value equivalent to approximately 18.2% of the value available to equity holders, by the end of this week. 18.2% is arrived at by dividing $35,400,000 by $194,700,000 (the NAP).
49 To further complete the illustration, I did the same calculation on the basis that the
Arbitration proceeds are $1 billion, and received in two years. Assuming tax payable of
$150,000,000, the result would be as follows:
DIP Unsecured DIP Lender Management Net Stock Existing Lender Creditors (Additional (MIP) arbitration Options shareholders (secured Compen- proceeds (4%of (96% of
debt) sation) available to NAP) NAP)
/Company
i I
. ("NAP")
I i I
Notional Values assuming arbitration proceeds are received in two years: I
43,600,000 133,100,000 235,655,000 i 67,330,000 370,315,000 14,812,600 355,502,400
50 This translates into management holding value equivalent to $82,142,600 or 23.1% of the value available to equity holders (or 18.2%, if the Stock Options are cancelled).
Timing of Payments
51 The structure of the MIP is such that management, as a secured creditor, would get payment under the MIP, regardless of whether any payment has been made or will ever be made to shareholders. Although I note that the MIP limits management payments to 25% of the "Residual Pool", and that Mr. van't Hof has stated his expectation that Crystallex will be liquidated after the Arbitration is settled or completed, the MIP does not give any comfort to shareholders in this regard. Again, fully aligning management's interests under the MIP with shareholder interests would address this concern.
Supervision by the Court
52 Although the Company is requesting the approval· of the MIP by the Court, and the creation by Court order of a charge securing management's proposed interest of 10% in the proceeds of Arbitration, no ongoing supervision or approval of the Court is contemplated when payments are made under the MIP. In some cases, including a prompt settlement of the Arbitration, very large amounts would be payable under the MIP in a very short period of time. As a stakeholder, I would be more comfortable with the continued involvement and supervision of the Court in MIP awards, particularly if other safeguards (as suggested above) are not included in the MIP structure.
SWORN before me at the City of
Toronto,on April 2, 2012.
A Commissioner for taking affidavits