TORONTO (miningweekly.com) – Activist shareholder Casablanca Capital on Thursday threatened US iron-ore miner Cliffs Natural Resources with legal action over a 'proxy put' that could result in cash-flow problems if the hedge fund’s slate of six board nominees were elected.

On Friday, Cliffs said in a proxy filing that should Casablanca’s nominees be elected at the special shareholder meeting scheduled for July 29, it could trigger a 'change of control' under the indenture governing Cliffs’ senior notes, potentially compelling it to repurchase the notes.

This mandatory repurchase, or proxy put, would result in a cash-flow crisis for Cliffs.

Casablanca said that it regarded this as a threat by Cliffs to shareholders not to vote for its set of board nominees.

"Casablanca intends to protect shareholder interests by all available means, including litigation, if the board persists in relying on a proxy put as a means of entrenching itself," the company said.

However, the hedge fund manager said that the proxy put could be defused by the Cliffs board approving the nominees proposed by Casablanca – not as an endorsement, but merely for the narrow purpose of not triggering the proxy put.

“Instead of implementing this now-common corporate governance measure, the board has implied a willingness to put the company’s very existence at risk, employing brinksmanship with the company’s liquidity in an attempt to preserve its current seats,” Casablanca said in a letter to Cliffs.

In March last year, the Delaware Court of Chancery ruled that the board of SandRidge Energy “failed to exercise its discretion in a reasonable manner". The judge ordered the board to desist resisting a proxy campaign by an activist fund, ruling that the company could continue campaigning only if it approved the dissident nominees to avoid triggering a proxy put.

Cliffs responded on Thursday, countering that it was not threatening its shareholders.

The Cleveland-based miner said that it was a standard provision for most companies with publicly issued debt. It noted that the change of control provision was previously disclosed, and now again as part of its preliminary proxy statement.

"The board will consider whether Casablanca’s nominees should be approved for purposes of its senior notes indenture in due course should Casablanca continue to seek control of Cliffs’ board," Cliffs said.

Casablanca, which owns and manages about 5.2% of Cliffs, in January launched a proxy fight, seeking to install its own CEO and directors, and suggesting the spin-out of certain of Cliffs’ international operations.

The fund manager highlighted what it termed “Cliffs’ failed expansion strategy” and the resultant loss of more than 80% of the company’s market value, which it alleged was being overseen by a majority of the current 11-member board.

Casablanca also outlined its proposal for a new strategy focused on Cliffs’ core US assets, which it believed would restore value for shareholders, and reiterated its support for 30-year metals and mining veteran Lourenco Goncalves as its chosen leader to assume the position of CEO of Cliffs.

The activist is advocating Cliffs to spin off its Bloom Lake iron-ore project, in Quebec, together with its Asia Pacific assets, to create ‘Cliffs International’.

Cliffs operates two distinct iron-ore businesses with very different risk/reward profiles. The Cliffs International assets are directly exposed to the competitive ‘seaborne’ iron-ore market, and the large Bloom Lake project is still in the development stage.

In contrast, the ‘Cliffs USA’ iron-ore assets benefit from unique supply and demand characteristics, and barriers to entry in the Great Lakes generate strong cash flow and ensure long-term contracts, which provides volume and price visibility.