Facing strict ‘use it or lose it’ rules governing use of radio spectrum, Boyd Craig committed joint venture company Cayman Spectrum to a Spark deal without authority to do so. The frantic wheeling and dealing was exposed in a week long High Court hearing: Craig held to have got the best deal he could have in the circumstances; Spark left with a contract it could not enforce.
Nearly twenty years ago, further spectrum management rights were up for auction, creating private property rights over allocated radio frequencies. This initiative super-charged internet connectivity in New Zealand. For providers, it was a land-grab; fighting for the best territory.
The High Court was told Ministry of Business, Innovation and Employment set strict rules for auction of what was recognised as a scarce economic resource: exclusive management of slices divvied out of radio spectrum.
Successful bidders had strict timelimits to become fully operative. Failure to do so would see spectrum rights lost. There was to be no sitting on an asset, seeking to make a profit with a later sale.
MBIE frowned on successful bidders later cuddling up with rivals. This could lead to competition issues and monopoly pricing; issues policed by the Commerce Commission.
There was one area where collusion with rivals was allowed; installation of so-called ‘guard bands.’ High-powered transmission in one spectrum has the effect of disrupting lower-powered transmission on neighbouring spectrum. Neighbours are allowed to negotiate how power output on boundaries can best be managed.
The High Court dispute was primarily an argument between two joint venture partners each owning a half share of Cayman Spectrum (NZ) Ltd. Cayman held two blocks in the 2.5 GHz spectrum.
On Cayman’s board, Mr Craig represented Craig Wireless, based in Canada; Rahul Prakash represented Everest LP, based in the United States. Everest LP later came under control of telco entrepreneur Malcolm Dick.
In November 2015, Cayman was at grave risk of losing its spectrum allocation. It had neither the time nor the money to fully roll out its promised services.
Behind Everest’s back, Mr Craig negotiated a network services agreement with Spark, allowing Cayman to use nominated towers controlled by Spark. This short-term fix enabled Cayman to achieve coverage required by its spectrum contract, avoiding loss of its spectrum allocation.
The agreement came at a price.
Mr Craig committed Cayman to handing over twenty per cent of the gross proceeds from any future sale of Cayman’s spectrum rights. At the same time, Mr Craig agreed on behalf of Cayman that previous guard band restrictions requiring Spark use lower power levels on the MHz bands adjacent to Cayman’s spectrum could be lifted.
Later learning of these arrangements, Everest was apoplectic. It sued Mr Craig, alleging as Cayman director he put his own personal interests ahead of the company and was in breach of his fiduciary duties. These allegations followed Mr Craig’ s negotiations with Spark over sale of management rights for 2.3 GHz spectrum that Mr Craig owned separately from his Cayman joint venture ownership of 2.5 GHz spectrum.
It was alleged Mr Craig was sacrificing Cayman to benefit his own separate interests.
Mr Craig’s sale of his 2.3 GHz rights to Spark was inextricably linked with the Spark/Cayman side deals, Everest alleged. Benefits to Spark at Cayman’s expense on both the 2.5 GHz coverage compliance and the lifting of guard bands assisted Mr Craig in negotiation of his separate sale of 2.3 GHz management rights, Everest claimed.
Justice Lang ruled there was no link.
Mr Craig’s separate sale of his 2.3 GHz interests to Spark could have been agreed on the same terms without Spark’s parallel agreements with Cayman, he ruled. Craig Wireless did not derive a benefit at Cayman’s expense.
Justice Lang further ruled there had been no failure by Mr Craig to act in best interests of Cayman. He was able to preserve Cayman’s only asset at a time when it was at risk of being forfeited for non-compliance. Cayman was in a weak bargaining position. Spark initially sought fifty per cent of sale proceeds from any onward sale by Cayman of its 2.5 GHz management rights in return for use of its towers. Mr Craig did manage to negotiate this percentage down to twenty per cent. He did the best he could, Justice Lang said.
Cayman later sold its 2.5GHz spectrum rights for USD 10 million. Spark claimed it was entitled to USD 2 million. Spark’s claim was dismissed by Justice Lang.
Mr Craig had no authority to commit Cayman to a deal splitting sale proceeds, ruled Justice Lang. Cayman’s registered constitution explicitly states that such transactions require the consent of all directors and all shareholders. Everest had no knowledge of the negotiations. It never agreed to the deal.
Justice Lang ruled that while there was no enforceable contract permitting Spark to recover USD 2 million, Spark is entitled to compensation at market rates for the eight month period Cayman used Spark’s towers. He invited the two sides to reach agreement on an appropriate figure.
Cayman Spectrum (NZ) Co v. Spark New Zealand Trading Ltd – High Court (8.02.24)
24.050
Addendum: In contrast to the 2024 New Zealand High Court case, a 2018 arbitration in Canada between Everest and Craig Wireless saw an arbitrator rule that Mr Craig was in breach of fiduciary duties owed Cayman.
Justice Lang suggested the Canada arbitrator did not have the full picture; there was no evidence from Spark at the arbitration.
Justice Lang indicated Malcolm Dick launched into the arbitration with a complete misunderstanding as to the sale price received by Mr Craig personally for separate sale to Spark of his 2.3 GHz spectrum rights; a factual issue that went to the heart of Everest’s claim against Mr Craig. Mr Dick mistakenly believed Spark had paid Mr Craig three times over the then market price for his 2.3 GHz spectrum.
The Canada arbitration saw Craig Wireless ordered to pay damages in excess of NZD 4.9 million. Payment was made by Craig Wireless transferring to interests associated with Mr Dick its half share in Cayman with a cash adjustment of USD one million paid in return to Craig Wireless.