Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Ltd (Formerly Anglo Irish Bank Corporation Ltd)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Briggs |
| Judgment Date | 27 July 2012 |
| Neutral Citation | [2012] EWHC 2090 (Ch) |
| Docket Number | Case No: HC11C01320 |
| Court | Chancery Division |
| Date | 27 July 2012 |
[2012] EWHC 2090 (Ch)
Mr Justice Briggs
Case No: HC11C01320
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Richard Snowden Q.C. and Mr Ben Griffiths (instructed by Hill Hofstetter LLP) for the Claimant
Mr Robin Dicker Q.C. and Mr Tom Smith (instructed by Freshfields Bruckhaus Deringer LLP) for the Defendant
Hearing dates: 13,14,18 June and 17 July 2012
Introduction
This part 8 Claim test, for the first time, the legality under English law of a technique used by the issuers of corporate bonds which has acquired the label "exit consent". The technique may be summarised thus. The issuer wishes to persuade all the holders of a particular bond issue to accept an exchange of their bonds for replacement bonds on different terms. The holders are all invited to offer their bonds for exchange, but on terms that they are required to commit themselves irrevocably to vote at a bondholders' meeting for a resolution amending the terms of the existing bonds so as seriously to damage or, as in the present case substantially destroy, the value of the rights arising from those existing bonds. The resolution is what has become labelled the exit consent.
The exit consent has no adverse effect in itself upon a holder who both offers his bonds for exchange and votes for the resolution. That is either because the issuer nonetheless fails to attract the majority needed to pass the resolution (in which case both the resolution and the proposed exchange do not happen) or simply because, if the requisite majority is obtained, his bonds are exchanged for new bonds and cancelled by the issuer. By contrast, a holder who fails to offer his bonds for exchange and either votes against the resolution or abstains takes the risk, if the resolution is passed, that his bonds will be either devalued by the resolution or, as in this case, destroyed by being redeemed for a nominal consideration. This is in part because the efficacy of the technique depends upon the deadline for exchange being set before the bondholders' meeting so that, if the resolution is then passed, the dissenting holder gets no locus poenitentiae during which to exchange his bonds on the terms offered, and accepted in time, by the majority.
It is readily apparent, and not seriously in dispute, that the purpose of the attachment of the exit consent to the exchange proposal is to impose a dissuasive constraint upon bondholders from opposing the exchange, even if they take the view that the proffered new bonds are (ignoring the exit consent) less attractive than the existing bonds. The constraint arises from the risk facing any individual bondholder that a sufficient majority of his fellow holders will participate in the exchange and therefore (as required to do) vote for the resolution. The constraint is variously described in textbooks on both sides of the Atlantic as encouraging, inducing, coercing or even forcing the bondholders to accept the exchange.
The technique depends for its persuasive effect upon the difficulties faced by bondholders in organising themselves within the time allowed by the issuer in such a way as to find out before the deadline for accepting the exchange whether there is a sufficient number (usually more than 25% by value) determined to prevent the exchange going ahead by voting against the resolution. They were described in argument as facing a variant of the well-known prisoner's dilemma.
Exit consents of this type (but falling short of expropriation) have survived judicial scrutiny in the USA, in the face of challenge by minority bondholders. In Katz v Oak Industries Inc. (1986) 508 A.2d 873 the attachment of an exit consent designed to devalue the existing bonds in the hands of dissenting holders who declined an associated exchange offer was challenged in the Delaware Chancery Court as amounting to a breach of the contractual obligation of good faith by the issuer, as against the bondholders. It was not suggested that the participation in the process by the majority bondholders (by committing themselves to vote for the proposed amendment devaluing the existing bonds) constituted an abuse by them of their rights under the terms of the bond issue to bind the minority to a variation of those terms. Chancellor Allen concluded that the particular exit consent in that case, (which included the removal of significant negotiated protections to the bondholders, and the deletion of all financial covenants), did not despite its coercive effect amount to a breach of the contractual obligation of good faith between issuer and bondholders in what he evidently regarded as an ordinary commercial arms-length contract.
By contrast, the challenge made in the present case to the exit consent technique is mainly based upon an alleged abuse by the majority bondholders of their power to bind the minority, albeit at the invitation of the issuer. The challenge is based upon the well recognised constraint upon the exercise of that power by a majority, namely that it must be exercised bona fide in the best interests of the class of bondholders as a whole, and not in a manner which is oppressive or otherwise unfair to the minority sought to be bound. Such limited published professional comment as there is upon the use of this technique within an English law context appears to assume that, provided the exchange offer and associated exit consent proposal is made and fairly disclosed to all relevant bondholders, no question of oppression or unfairness can arise. I was told (although it is impossible for the court to know for sure) that this technique has been put into significant, if not yet widespread, use within the context of bonds structured under English law, in particular in connection with the affairs of banks and other lending institutions requiring to be re-structured as a result of the 2008 credit crunch, so that a decision on this point of principle may be of much wider consequence than merely the amount at issue between the parties to this claim, which relates to subordinated notes in the company then known as Anglo Irish Bank Corporation Limited ("the Bank") acquired by the claimant Assenagon Asset Management S.A. in tranches between September 2009 and April 2010, for an aggregate of just over €17m.
The Facts
There is no dispute about the primary facts, which consist of the terms of the relevant bonds, the circumstances in which the exchange proposal was launched, succeeded and concluded, so far as affects the claimant, by redemption of its €17m Notes for a payment by the Bank of a mere €170.
There is by contrast not a complete unanimity as to background facts. The parties' differences related more to the relevance of parts of the background, and no request was made by either side for cross-examination. As will appear, I have not found it necessary to resolve any disputes as to fact and little of the background was of significant assistance in resolving the issues which I have to decide. These concern construction (including for that purpose implied terms), together with the allegation of infringement of the constraint upon the exercise of the power by a majority to bind a minority to which I have referred.
The bond issue to which this dispute relates consists of the Bank's subordinated floating rate notes due 2017 ("the 2017 Notes") issued by the Bank on 15 June 2007 pursuant to the terms of a trust deed dated 15 August 2001 between the Bank and Deutsche Bank Trustee Co. Limited ("the Trustee") as subsequently amended and supplemented by six supplemental trust deeds. I shall refer to the re-stated form of the trust deed applicable to the 2017 Notes as "the Trust Deed". Terms particular to the 2017 Notes are also contained in written Final Terms dated 15 June 2007 ("the Final Terms"). The commercial terms of the 2017 Notes may be summarised as follows:
i) They were to mature in 2017, for redemption at par, unless redeemed earlier at the Bank's election (also at par) on any interest payment date after 19 June 2012.
ii) In the meantime they carried a floating rate of interest at 0.25% above three months Euribor until 2012 and 0.75% above three months Euribor thereafter.
iii) The Notes were subordinated, so as to be prioritised for payment in an insolvency after all secured and unsecured creditors (including the Bank's depositors) and ahead only of equity shareholders. They were wholly unsecured.
The 2017 Notes were issued as part of the Bank's Euro Medium Term Note Programme. The Bank issued, in addition, subordinated notes due 2014 and 2016 ("the 2014 and 2016 Notes"). The nominal amount of the 2017 Notes was €750m. I am invited to assume that, for the most part, holders of the 2017 Notes were, at the time of the exchange offer, sophisticated professional investors.
It is necessary to focus in some detail upon the provisions in the Trust Deed providing what counsel called "note-holder democracy", namely the calling of note-holders' meetings, the extent of the powers of the majority to bind the minority, the requisite quorum and voting majorities, together with a particular voting disability prayed in aid by the claimant.
The 2017 Notes were issued in the form of a single global note to a depository, such that investors recorded as holding proportions of the aggregate nominal amount in the books of the depository were to be treated for all purposes under the Trust Deed as note-holders: see...
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