SYDNEY – A bitter legal battle between Gina Rinehart and her children over control of Australia's largest mining fortune could ultimately lead to a shift of power in the board room and loosen the tycoon's legendary grip on her business empire.
Asia's richest woman is being sued by two of her children who accuse Rinehart of breaching her duty as the sole trustee of a $4 billion family trust. She denies acting improperly and recently agreed to step down as trustee.
But the feud, which has gripped Australia as details of the family's testy relationships have been laid bare in personal emails tendered to the court, still has a risk of playing out in the boardroom of privately held Hancock Prospecting Pty Ltd.
With the disputed trust and Rinehart the only shareholders, her power over Hancock Prospecting has been virtually absolute as the sole trustee of the fund for her four children.
So the appointment of a new trustee could have major ramifications in the two-year legal battle with her eldest two children, John Hancock, 37, and Bianca Rinehart, 36.
With access to the trust, the children could press their rights as minority shareholders for representation on the board, leaving Hancock Prospecting more open to external influence, legal experts say, just as Rinehart is trying to wrap up funding for a $10 billion iron ore project.
"They will become substantial shareholders and may push for influence in management decisions, rather than being passive shareholders," said Professor Michael Adams, dean of the law school at the University of Western Sydney.
John, Bianca and their sister Hope Rinehart Welker, 28, sued in 2011 to remove their mother as the trust manager after she pushed out its vesting date until 2068, meaning the children would not get their shares until they were in their 80s and 90s.
Rinehart warned they would be hit with a huge tax bill if the trust was allowed to vest and offered them each $300 million to accept the change in the vesting date.
Lawyers for the children are also examining changes made by Rinehart to the rules governing the trust, barring the children from transferring their shares to each other and giving Rinehart preemptive rights to buy the shares if any of them want out.
Rinehart later made concessions -- moving the vesting date to April 2012 and, ahead of the trial, stepping down as trustee.
She said the changes to the company constitution overseeing the trust were necessary because she needed total control for negotiations with Rio Tinto to form a joint venture to develop the Hope Downs mine.
Lawyer Christopher Withers, representing John and Bianca, told the New South Wales Supreme Court there was no evidence to support this and argued the changes were for Rinehart's benefit.
Rinehart's hard head for business is legendary. The so-called "Pilbara Princess", the only child of Australia's most prominent frontier miner, has used a string of lawsuits to protect her riches, estimated by Forbes at $18 billion.
Rinehart, 59, has multiplied the fortune left by her father, Lang Hancock, who is credited with discovering the world's largest deposit of iron ore in Australia's Pilbara region.
"The value of the trust property has grown enormously through Mrs Rinehart's responsible endeavours and very hard work," her lawyer Paul McCann said.
Among the revelations in court was an email from Hope, who pulled out of the case earlier this year, to her mother complaining about being "down to my last $60,000". Younger sister Ginia, 27, who has sided with her mother in the dispute, told Hope in another email to "just take the 300 million dollars mum has repeatedly offered you and walk away."
Rinehart, in turn, has described her elder children as lazy, spoilt and lacking skills to run the multi-billion-dollar trust.
Just who will become the new trustee -- and have responsibility for managing a shareholding controlling almost a quarter of Hancock Prospecting -- will now be determined by the court after the family was unable to agree on a candidate.
Judge Paul Brereton has asked for further submissions before making a decision, while there will be further hearings to decide whether anyone is liable for damages.
While the children's combined shareholding is just shy of the 25 percent needed to pass special resolutions, it puts them in a position to press their rights as minority shareholders and seek more power via the courts, legal experts say.
As well as the restrictions imposed by Rinehart's changes due to the Rio joint venture, Hancock Prospecting's current constitution bars them, even as shareholders, from a board seat or from increasing dividends they receive.
Gina is entitled to a seat as a 75 percent shareholder. That, combined with the fact she is trustee of the only other shareholder, has given her power to appoint -- and remove -- the children on the board as they have fallen in and out of favour.
"It would be a strong argument that the majority shareholder has so changed the constitution to reduce the genuine trust value of the minority shareholders," said Roger Downs, a senior partner at Kells Lawyers in Sydney.
A move to vest the trust and hand the children direct control of the shares would be down to the new trustee, but it's likely that one or more of the children will push for board representation.
This could also theoretically mean they could take out loans using shares as a collateral that in the event of a default could be claimed by an external lender, said Downs.
IRON ORE PROJECT
Law Professor Adams also said Rinehart could suffer reputational damage if found to have breached corporate governance rules, an outcome that could be unsettling for future negotiations with investors.
Rinehart, who did not respond to a request for comment, has complained that the litigation was damaging her attempts to line up funding for the Pilbara-based Roy Hill iron ore mine.
Sources told Reuters in July that Roy Hill had overcome key hurdles holding up debt negotiations, but the company was yet to make a formal announcement.
Roy Hill has faced delays lining up $7 billion in debt funding and is now expected to begin production in 2015. Hancock owns 70 percent of the project, with the rest held by South Korea's POSCO <005490.KS>, Japan's Marubeni Corp <8002.T> and Taiwan's China Steel Corp.
Hancock Prospecting's lawyer, David Studdy, told the court that Bianca and John were on a "kamikaze mission" that could threaten the Hope Downs venture with Rio Tinto. Withers, representing the children, said they had no interest in damaging the agreement and legal fixes were available to avoid that scenario.
(Editing by Ed Davies)