First Majestic reaches consent order with Davila Santos

2009-07-16 15:44 ET - News Release

Mr. Keith Neumeyer reports

UPDATE OF LITIGATION

First Majestic Silver Corp. has provided an update on the status of its continuing litigation with Hector Davila Santos, the prior majority shareholder of First Silver Reserve Inc. (FSR), with respect to alleged interference with FSR's opportunity to acquire the Bolanos mine in Mexico. FSR later became a wholly owned subsidiary of the company.

In November, 2007, an action was commenced in British Columbia by the company and its wholly owned subsidiary, FSR, against Mr. Davila Santos and Minera Arroyo Del Agua S.A. de C.V. whereby the company and FSR allege that while holding the positions of director, president, chief executive officer and chairman of the board of FSR, Mr. Davila Santos wrongfully interfered with FSR's opportunity to acquire the Bolanos mine and breached his fiduciary and statutory duties owed to FSR, which resulted in Mr. Davila Santos personally or through Minera Arroyo, acquiring the Bolanos mine from Grupo Mexico for his own interests.

The court has yet to rule on these allegations. Pending resolution of this action the company withheld certain amounts owing to Mr. Davila Santos with respect to the purchase of shares in FSR which the company acquired from Mr. Davila Santos in 2006. The withheld amounts consist of quarterly instalments of interest due on Nov. 30, 2007, Feb. 29, 2008, and May 30, 2008, as well as the final principal payment of $13,341,380 due to Mr. Davila Santos on May 30, 2008. The total amount withheld from Mr. Davila Santos and due as at May 30, 2008, was $13,940,097. A letter of credit in the amount withheld plus interest, amounting to $14,485,759, was previously posted by First Majestic with the courts and a reserve of cash equalling this amount has been maintained by the company. On March 14, 2008, Mr. Davila Santos filed a statement of defence and counterclaim in respect of the action referred to above. Pursuant to the counterclaim, Mr. Davila Santos has claimed, among other things, for payment of the amounts referred to above.

The parties have now agreed to a consent order with respect to the funds represented by the letter of credit. Pursuant to the order, $14,258,332 will be paid out of the letter of credit to the trust account of the lawyers of Mr. Davila Santos. The remaining $227,420 will be paid out to the company and the letter of credit will be cancelled. The amounts paid to the company may be used as the company sees fit. The consent order requires that the funds be held in the trust account of the lawyers pending the outcome of the litigation, with trial scheduled to commence in the Supreme Court of British Columbia, Vancouver, B.C., on April 12, 2010. If the trial has not commenced by June 30, 2011, the funds will be released on that date to Mr. Davila Santos, unless otherwise ordered by the court. The consent order does not affect the standing of the company's claims against Mr. Davila Santos. The effect of the consent order on the company's financial position will be to simultaneously reduce vendor liability and interest as well as restricted cash by offsetting amounts of $14,485,759, with $227,420 of cash being reclassified from restricted cash to cash (unrestricted cash). The net assets of the company will not be increased or decreased as a result of this order.

The company's president and chief executive officer, Keith Neumeyer, stated: "We think that this consent order is a reasonable compromise with Mr. Davila Santos and gives First Majestic comfort that if our action against Mr. Davila Santos is successful we will be able to enforce the judgment against these moneys which will continue to reside within Canada and be subject to the jurisdiction of the British Columbia courts."

We seek Safe Harbor.