Elektrim SA v Vivendi Holdings 1 Corporation Law Debenture Trust Corporation Plc v Vivendi Holdings 1 Corporation
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lawrence Collins,Lady Justice Hallett,Sir Anthony May, P |
| Judgment Date | 24 October 2008 |
| Neutral Citation | [2008] EWCA Civ 1178 |
| Docket Number | Case No: A3/2007/2497 & 2567 Case No Hc07c00763 HC07C00763 & HC07C01505 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 October 2008 |
[2008] EWCA Civ 1178
Sir Anthony May
(the President Of The Queen's Bench Division)
Lady Justice Hallett and
Lord Justice Lawrence Collins
Case No: A3/2007/2497 & 2567
Case No Hc07c01505
Case No Hc07c00763
HC07C00763 & HC07C01505
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE LEWISON
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Richard Millett QC and Mr Julian Kenny (instructed by Barlow Lyde & Gilbert) for Elektrim S.A.
Mr Robert Miles QC and Mr Andrew Clutterbuck (instructed by Simmons & Simmons) for Law Debenture Trust Corporation PLC
Mr Ali Malek QC and Mr David Quest (instructed by Orrick, Herrington & Sutcliffe) for Vivendi Holdings 1 Corp
Hearing date: July 29, 2008
I Introduction
No-action clauses
The principal question on this appeal relates to the construction of a “no-action” clause in a bond issue, whereby only the trustee of the issue is entitled to take enforcement action against the issuer, and bondholders cannot proceed directly against the issuer unless the trustee fails to take action in accordance with the bond documentation. Such clauses have been common in bond issues governed by English law since the nineteenth century, and in bond issues in other common law countries.
The use of a trustee is an effective way of centralising the administration and enforcement of bonds. Bondholders act through the trustee, and share pari passu in the fortunes of the investment, and do not compete with each other. The trustee represents and protects the bondholders, who are treated as forming a class, and who give instructions to the trustee through a specified percentage of bondholders. Such a scheme promotes liquidity. Individual bondholders rely on the trustee as the exclusive channel of enforcement and can be confident that on enforcement principal and interest will be distributed pari passu.
No-action clauses are the subject of many decisions in the United States and Canada. They include the recent decision of the Ontario Court of Appeal in Casurina Limited Partnership v. Rio Algom Ltd. (2004) 40 BLR (3d) 112, in which it upheld the lower court's approval of the approach in the United States (citing Feldbaum v. McCrory Corp., 1992 Del. Ch. LEXIS 113) that in consenting to no-action clauses by purchasing bonds, bondholders waive their rights to bring claims that are common to all bondholders, and thus can be prosecuted by the trustee, unless they first comply with the procedures in the instrument constituting the bonds. As I said in Re Colt Telecom Group plc [2002] EWHC 2503 (Ch.), [2003] 1 B.C.L.C. 290, at [12], no-action clauses have even been the subject of discussion in the International Court of Justice (although not the subject of decision) in relation to insolvency proceedings brought directly by bondholders: Belgium v. Spain (Barcelona Traction case), 1970 ICJ Rep 3, 104–5, per Judge Sir Gerald Fitzmaurice QC.
In the United States it has been said that a primary purpose of a no-action clause is to protect issuers from the expense involved in defending lawsuits which are either frivolous or otherwise not in the economic interest of the issuer and its creditors, causing expense to the issuer and diminishing the assets available to bondholders. In protecting the issuer such clauses protect bondholders. They can extend to non-contractual claims (other than fraudulent inducement of a purchase) because interpreting the no-action clause to exclude non-contractual claims would lead to inefficient claim-splitting. If the no-action clause required a noteholder to demand that the trustee should bring all contractual claims, but the noteholder had to bring the non-contractual claims, that would lead to a situation where contractual and non-contractual claims would have to be brought by different plaintiffs, possibly in different fora: see e.g. Feldbaum v. McCrory Corp, ante; US Bank National Assn v US Timberlands Klamath Falls LLC, 864 A 2d 930 (Del Ch 2004); cf. McMahan & Co v Wherehouse Entertainment Inc, 859 F Supp 743 (SDNY 1994); Re Dura Automotive Systems, Inc, 379 B.R. 257 (SDNY 2007).
Parties
Elektrim S.A. (“Elektrim”) is a Polish conglomerate (formerly state-owned) and now in bankruptcy, which has had substantial telecommunications interests. The Law Debenture Trust Corporation plc (“the Trustee”) is the Trustee of €510,000,000 2% Bonds (“the bonds”) originally issued in 1999 by Elektrim Finance BV (a special purpose vehicle), and guaranteed by Elektrim. The bonds were restructured in 2002: the maturity date was extended to December 15, 2005 and the interest rate was reduced, in return for which Elektrim agreed to make a contingent payment in 2006 (or earlier in certain circumstances), which represented 25% of the fair market value of Elektrim's assets in excess of €160m. This is referred to in this case as the “contingent payment” or the “equity kicker”.
Elektrim had a 48% interest in Polska Telefonia Cyfrowa (“PTC”) a leading mobile telephone service provider in Poland. Deutsche Telecom AG (“DT”), a major German media company, also had a substantial holding in PTC.
The dispute
A major French media company called Vivendi Universal SA (“Vivendi”), which had a joint venture with Elektrim, has been in dispute since 1999 with Elektrim and with DT about Elektrim's PTC stake. The Vivendi/Elektrim joint venture company is called Elektrim Telecommunikacja known as ET or Telco (and to which I shall refer as “Telco”), owned 51% by Vivendi and 49% by Elektrim. Vivendi says that Telco was formed to acquire Elektrim's 48% shareholding in PTC; that ultimately it acquired a controlling interest in Telco; that it has invested over €2 billion under various agreements and is entitled, through ET/Telco, to the PTC stake. Vivendi says that the shares in PTC had a market value of about US$3 billion.
DT challenged the transfer by Elektrim of the PTC shares to Telco, and claimed that it had an option over the PTC shares under a 1995 shareholder agreement, which it claimed to have exercised following Elektrim's entry into the joint venture with Vivendi. Elektrim says that it was originally entitled to the PTC stake and that, by virtue of various awards of an arbitral tribunal sitting in Vienna, Elektrim was obliged to transfer the stake to DT.
Vivendi claims that the transfer of the PTC shares to DT is invalid and at a substantial undervalue, and is part of a long-running fraudulent scheme by Elektrim and Mr Zygmunt Solorz-Zak (a Polish businessman who was the principal shareholder of Elektrim) to strip the assets out of Elektrim for his own benefit, and that DT has colluded in the fraud (and that the Vienna arbitration was a collusive device).
The battle for control of the PTC stake has been fought in numerous proceedings, including arbitrations in Vienna, Switzerland and London, and bankruptcy proceedings in Poland. There has also been related litigation (including claims brought by Vivendi against Mr Solorz-Zak) in France, Germany, and Switzerland, and in Seattle, Washington. Many millions of dollars in legal fees have been expended on this dispute.
Vivendi's acquisition of bonds
In 2007 Vivendi Holdings 1 Corp (“VH1”), a Delaware corporation with its principal place of business in New York and a subsidiary of Vivendi, acquired a substantial holding in the bonds, allegedly for commercial reasons. In fact it is apparent that VH1's acquisition of the bonds was for the purpose of pursuing Vivendi's battle with Elektrim by indirect means.
VH1 commenced proceedings in Florida against Elektrim and the Trustee alleging (inter alia) fraud against them, and also breach of fiduciary duty and negligence against the Trustee, although the fraud claims against the Trustee were later dropped. Lewison J granted anti-suit injunctions in favour of Elektrim and the Trustee, and this is an appeal by VH1 against the injunction in favour of Elektrim (permission to appeal having been given by Rix LJ) and a renewed application by VH1 for permission to appeal from the injunction in favour of the Trustee.
II The bonds and the 2002 Restructuring
As I have said, the restructuring of the bonds which took place in 2002 involved an extension of the maturity date to December 15, 2005 and a reduction of the interest rate, in return for which Elektrim agreed to make a contingent payment, which represented 25% of the fair market value of Elektrim's assets in excess of €160m. The Trust Deed was amended and restated on November 15, 2002 to reflect this restructuring. The Trust Deed, the bonds and the Bond Conditions were governed by and to be construed in accordance with English law (Trust Deed, clause 29.1).
The effect of clause 2.3 of the Trust Deed and Condition 6(k) of the Bond Conditions was that Elektrim was required to pay the contingent payment/equity kicker on the Contingent Payment Date (which was to be 180 days after the earlier of the date of publication of Elektrim Finance's accounts for the year ending December 31, 2005, or the year ending on the December 31 immediately following disposal of interests in certain defined assets, including its interest in Telco). As I have already indicated, in broad terms the amount of the contingent payment is a specified proportion of the difference between: (a) the fair market value of Elektrim's net assets...
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