Cantor Fitzgerald & Company v YES Bank Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Bright |
| Judgment Date | 31 March 2023 |
| Neutral Citation | [2023] EWHC 745 (Comm) |
| Docket Number | Case No: CL-2021-000447 |
| Court | Queen's Bench Division (Commercial Court) |
[2023] EWHC 745 (Comm)
Mr Justice Bright
Case No: CL-2021-000447
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, WC4A 1NL
Mr Adrian Beltrami KC and Mr Ravi Jackson (instructed by Allen & Overy LLP) for the Claimant
Mr John Taylor KC and Mr Christopher Langley (instructed by Hogan Lovells International LLP) for the Defendant
Hearing dates: 14, 15, 16, 21 March 2023
Approved Judgment
This judgment was handed down remotely at 10am on 31 March 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction and the parties
This judgment follows the trial of the claim of the Claimant (“Cantor”) against the Defendant (“YES Bank”) arising from Cantor's efforts to raise finance for YES Bank in late 2019 to early 2020.
Cantor was represented by Mr Adrian Beltrami KC and Mr Ravi Jackson. YES Bank was represented by Mr John Taylor KC and Mr Christopher Jackson. I am grateful to all four counsel for the skill and thoroughness of their submissions and assistance.
Cantor is a US broker-dealer, investment bank and financial advisor, based in New York. YES Bank is an Indian bank, based in Mumbai.
In 2019, YES Bank was undergoing severe financial problems, which were widely reported. It urgently needed to attract additional capital investment. Cantor was engaged to assist (as were various other advisors/institutions).
This dispute arises under an Engagement Letter dated 17 December 2019 and signed on 18 December 2019 (as amended on 24 February 2020), which constituted the contract between Cantor and YES Bank.
Cantor claims to be entitled to a fee under the Engagement Letter, being 2% (the agreed fee rate) of investments made by three parties defined in the Engagement Letter (as amended) as “Investors”. The main issue between the parties on this claim concerns the construction of a few words in one sentence of one clause of the Engagement Letter.
Securities issues and the raising of capital by Indian public companies
The issue of new securities and the raising of capital finance in relation to public Indian companies are naturally subject to regulations. The relevant Indian regulator is the Securities and Exchange Board of India (“SEBI”).
The regulations are most stringent in relation to any public offering – whether an Initial Public Offering (“IPO”) or a Further Public Offering (“FPO”). The essence of a public offering is that the opportunity to invest is generally available, including to retail investors. In 2019, YES Bank was already established as a public company, so the potentially relevant form of public offering would have been an FPO.
One form of private placement common in India (but not in many other countries) is a Qualified Institutional Placement (“QIP”), in which shares are offered to Qualified Institutional Buyers (“QIBs”) – institutional investors who fall into any of a series of defined categories under the relevant SEBI regulations.
Another form of private placement is a preferential issue, in which the opportunity to invest can be offered to anyone of the company's choosing (i.e., it is not restricted to QIBs), only to a numerical limit – in this case, 200).
The final possibility that it is relevant to mention is a rights issue, in which the opportunity to invest is offered only to existing shareholders. The only way that new investors can become involved via a rights issue is if the existing shareholders (or some of them) renounce their rights to subscribe to the new equity shares, in which case the right to invest can be offered to others.
Each of these routes has different features and (therefore) different advantages and disadvantages. Public offerings attract the heaviest regulation and the most prescriptive requirements. The regulatory requirements for an IPO/FPO cover (among other things) the preparation and publication of a prospectus and disclosures, which must be put into the public domain before the IPO/FPO issue. If the company in question is a bank with severe financial difficulties, the public broadcast of the details of those financial difficulties, before it has secured access to any new investment capital, could be particularly troublesome. In an extreme case, it might cause a run on the bank. This reduced its attractiveness to YES Bank. Furthermore, a public offering must be managed by an Indian-registered merchant bank (which Cantor is not), which reduced its attractiveness to Cantor.
A QIP and a rights issue would also require a degree of mandatory disclosure, but the process would not be as demanding as the preparation of a prospectus. In the case of a QIP, it would not require the same advance publication as would apply to a public offering. Both a QIP and a rights issue would also require the involvement of an Indian-registered merchant bank.
A preferential issue would not require any specific mandatory disclosure. Nor would it require the involvement of an Indian-registered merchant bank.
It is also possible in principle to raise capital via several of these methods, in combination. In particular, it is possible to have a preferential issue (or QIP), which brings in new shareholders, followed by a rights issue which includes both the previous shareholders and the new shareholders; alternatively, a rights issue followed by a preferential issue (or QIP).
Cantor is not registered in India as a merchant bank. It therefore could not act as the lead manager of an IPO/FPO, QIP or rights issue, although it would be able to assist with any of those transactions as a mere offshore advisor. Be that as it may, as an experienced and well-regarded New York finance house, Cantor was able to offer both expertise and the benefit of its relationships with potential investors, in particular in the US.
i) From YES Bank's perspective, one principal reason for engaging Cantor was the perception that Cantor might be able to introduce and/or successfully woo investors who would not otherwise be involved – in particular, investors from the US and elsewhere outside India and Europe (because YES Bank already had other advisors in place for Indian and European investors).
ii) From Cantor's perspective, the transaction offered the opportunity to earn a fee by securing investment from such new investors.
iii) From both perspectives, this would work by Cantor attracting capital from such new investors and being paid a fee proportionate to their investment.
In such cases (especially where more than one advisor is engaged), the parties typically agree on potential investors that the relevant advisor (here, Cantor) will target. The specified investors are then ‘ring-fenced’ for that advisor, who will be entitled to a fee if these investors contribute investment capital within the terms of the agreement.
YES Bank's financial problems
YES Bank's financial problems became prominent in early 2019, when it became apparent that there had been significant under-reporting of stressed assets (bad loans). The long-term Chief Executive Officer, Mr Rana Kapoor, who had been one of YES Bank's original founders, was forced out by the Reserve Bank of India (“RBI”). In March 2019, a new Managing Director and Chief Executive Officer was appointed, Mr Ravneet Gill.
In August 2019, YES Bank raised INR19.3 billion (around US$273 million) via a QIP. This was nothing like sufficient. The view of YES Bank's board in August 2019 was that further investment of about US$1.5 billion was required. Financial advisors were appointed to assist in raising this additional capital.
YES Bank's situation continued to deteriorate. The share price tumbled and the bank was downgraded by ratings agencies. By early December 2019 there was widely reported public speculation questioning YES Bank's viability. Its tenor is summed-up by the headline of an op/ed piece in The Economic Times on 12 December 2019 (which was circulated internally within Cantor):
“View: Yes Bank needs an arranged match, otherwise it's No Bank”.
In submissions, Mr Taylor KC said that YES Bank needed “survival capital”. Cantor objected to this terminology, which was not used at the time. Nevertheless, it was obvious to all onlookers that YES Bank's lack of capital funding was an existential crisis. It was certainly obvious to Cantor: on 11 December 2019, Mr Ashwani Mathur (Managing Director of Global Equities) wrote to Mr Anshu Jain (President of Cantor):
“The mood on Dalal Street is sombre. The stock is down 16% on the day as I write. There are real issues that the market is questioning on leadership, size of the hole and survival of the bank.”
The engagement of Cantor
Before appointing Cantor, YES Bank first appointed two other financial advisors – Avendus Capital Private Limited (“Avendus”) on 30 September 2019 and Prime Securities Limited (“Prime”) on 1 November 2019.
The engagement of Cantor came about because Mr Gill had previously worked for some time at Deutsche Bank, where one of his colleagues had been Mr Jain, now the President of Cantor. Mr Gill contacted Mr Jain at some point in late November or early December, with a view to engaging Cantor's assistance.
There is no direct written record of these initial communications between Mr Gill and Mr Jain. They seem to have spoken by telephone, without directly involving anyone else in their calls or taking notes or reporting on the calls via email or SMS text (or any other written medium) to anyone else within YES Bank or Cantor (respectively).
The first written record that in any way reflects the discussions between Mr Gill and Mr...
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