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Westminster Securities Corp v. Petrocom Energy Limited

January 19, 2011

WESTMINSTER SECURITIES CORP., PETITIONER,
v.
PETROCOM ENERGY LIMITED, AND PETROCOM LIMITED, RESPONDENTS.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION & ORDER

Petitioner Westminster Securities Corporation ("Westminster") has filed a petition to confirm an arbitration award (the "Award") arising out of its service as financial adviser and placement agent to respondents Petrocom Energy Limited and Petrocom Liminted (collectively, "Petrocom").*fn1

Petrocom has moved to vacate the Award. For the following reasons, Petrocom's motion to vacate the Award is denied and Westminster's petition to confirm the Award is granted.

BACKGROUND Westminster is a New York-based boutique investment firm that specializes in raising capital for private Chinese companies. Petrocom Energy Limited is a Cayman Islands company headquartered in Hong Kong; its parent company, Petrocom Limited, is a Hong Kong company with its principal place of business in Hong Kong. Petrocom is in the business of constructing coal blending facilities in China.

By an engagement letter dated May 24, 2005 (the "2005 Letter"), Petrocom retained Westminster as a non-exclusive financial adviser. On May 10, 2006, the parties entered into a new engagement agreement which superseded the 2005 Letter (the "2006 Letter") and which made Westminster Petrocom's exclusive placement agent "for all investment banking transactions, including debt and equity placements for a period of three (3) years." The 2006 Letter contemplated that Westminster would raise $100 million for Petrocom through one or more offerings of its securities. Under the terms of the 2006 Letter, Westminster would receive both 5% of the gross proceeds from each sale of common stock or equity securities and warrants to purchase 8% of the shares sold in any financing.

On June 29, 2006, the parties entered into a private placement agreement which superseded the 2006 Letter (the "2006 Agreement") and provided that Westminster would be Petrocom's "exclusive agent for all investment banking transactions, including debt and equity placements." The 2006 Agreement similarly provided for basic compensation in the form of 5% of gross proceeds and warrants to purchase 8% of the shares in any given financing; it also contained provisions for a monthly advisory fee and the reimbursement of Westminster's expenses in connection with the securities offerings. The 2006 Agreement contained a so-called "tail provision" providing for Westminster's compensation in the event of the agreement's termination: [U]ntil two (2) years following any termination of this Agreement, Westminster shall be entitled to receive, and the Company shall be obligated to pay to Westminster, the following fees with respect to any financing in the Company by any entity introduced directly or indirectly to the Company by Westminster or with whom Westminster was working on behalf of the Company at the Company's direction: (i) 5% of the gross proceeds of each closing of such financing, payable at each closing, and (ii) warrants to purchase 8% of the total Common Stock issued and issuable from such financing . . . .

Section 8(c) (Emphasis supplied.) The 2006 Agreement also contained a survival clause which provided

The parties acknowledge that certain provisions of this Agreement must survive any termination or expiration thereof in order to be fair and equitable to the party to whom any promise of duty to perform is owed under such provision prior to such termination or expiration of the Agreement.

Therefore, the parties [sic] the provisions of Sections 1, 2, 3, 4, 5, 7, 8(c), 10, 11, and 12 shall survive the termination or expiration of this Agreement for the period required to meet and satisfy any obligations and promises arising therein and thereunder. (Emphasis supplied.) The offering carried out pursuant to the 2006 Agreement raised $7.8 million in financing for Petrocom. Petrocom paid Westminster $472,761 in commission and expenses, but did not pay any advisory fees or issue any warrants under the 2006 Agreement.

The parties entered into a new private placement agreement on January 17, 2007 (the "January 2007 Agreement") which was identical to the 2006 Agreement except for its lack of provision for a monthly advisory fee. On April 1, 2007, the parties amended the 2006 Agreement to provide that Westminster would become the "non-exclusive agent for all investment banking transactions including debt and equity placements" and to disclaim any right to additional advisory fees. The parties also entered into a new placement agreement (the "April 2007 Agreement") which "differed from the 2006 and January 2007 Private Placement Agreements in that it provided for compensation to Westminster only for 'sale of the Preferred Shares by the Placement Agent.'" The offering conducted pursuant to the April 2007 Agreement closed on May 21, 2007.

After the closing of the April 2007 offering, Westminster facilitated additional financing and purchases of Petrocom shares. The extent of Westminster's involvement in securing this third-party financing is a matter of dispute between the parties, but the transactions at issue here are (1) Petrocom share purchases totaling $30 million by two entities, Standard Bank and Investec; (2) an $8 million credit line extended by Standard Bank and $30 million in "banking facilities" provided by a company called Natixis; and (3) the sale by Howard Au, Petrocom's Chief Executive Officer and Chairman, of 9.5 million Petrocom shares to three entities: Grand River Capital Investment Co. Ltd., GRC Partners Ltd., and RimAsia Capital Partners, L.P. The shares sold by Au were originally issued by Petrocom to AEI Asia Limited (AEI) in July 2007. When it purchased the Petrocom shares, AEI entered into a separate agreement with Au that provided that Au would use his "best efforts" to sell the shares in the event that AEI was unable to make additional investments in Petrocom. AEI subsequently invoked the best efforts clause; Au purchased AEI's shares and sold them to five entities in December 2007, three of which are Grand River Capital Investment Co. Ltd., GRC Partners Ltd., and RimAsia Capital Partners, L.P. Westminster played a role in locating these purchasers of Au's shares.

The 2006 Agreement, the April 2007 Agreement, and the January 2007 Agreement each contain an arbitration clause which provides in relevant part that

The validity, interpretation and construction of this Agreement, and each part hereof, will be governed by the local laws of the State of New York, without giving effect to its conflict of law principles or rules. In the event of a dispute, the parties hereto agree to be bound by the arbitration procedures of the American Arbitration Association, and that such arbitration shall take place in the New York City metropolitan area.

On October 15, 2008, Westminster commenced arbitration by submitting claims for the following: (1) warrant compensation, unpaid expenses, and monthly advisory fees for transactions for which Petrocom had already paid Petrocom 5% of gross proceeds under the private placement agreements; (2) compensation for the three financing transactions that took place after the closing of the April 2007 offering, as discussed above; and (3) the appointment of Jim O'Shea to the board of Petrocom. Petrocom denied that it owed Westminster any additional compensation ...


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