Lehman Brothers Finance AG ((in Liquidation)) v Klaus Tschira Stiftung GmbH

JurisdictionEngland & Wales
JudgeMr Justice Snowden
Judgment Date22 February 2019
Neutral Citation[2019] EWHC 379 (Ch)
CourtChancery Division
Docket NumberCase No: FL-2015-000008

[2019] EWHC 379 (Ch)




Royal Courts of Justice

Rolls Building, Fetter Lane,

London, EC4A 1NL


Mr Justice Snowden

Case No: FL-2015-000008

Lehman Brothers Finance AG (In Liquidation)
(1) Klaus Tschira Stiftung GmbH
(2) Dr H C Tschira Beteiligungs GmbH & Co KG

David Wolfson QC and Edmund King (instructed by Watson Farley & Williams LLP) for the Claimant

Robin Dicker QC and Henry Phillips (instructed by Clifford Chance LLP) for the Defendants

Hearing dates: 31 January, 1–3, 6–9, 14–16 February 2017

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Snowden

Index to Judgment




The Parties


The Transactions


Factual background


The Loss Calculation


Movement of the SAP share price


Subsequent events


The Issues


The disputes of fact


Can LBF allege bad faith?


General approach to interpretation


“Reasonably determines in good faith”


The meaning of “Loss”


The relevant date for the determination of Loss


Did the Defendants validly determine their Loss?


A valid determination of the Defendants' Loss




Mr Justice Snowden



This case raises a series of questions concerning the determination of “Loss” following an “Automatic Early Termination Event” under the ISDA Master Agreement (1992 Multicurrency-Cross-border form).


The main issues relate to the date by reference to which the determination of Loss should have been performed, and whether the basis for such determination in relation to a collateralised terminated transaction should be by reference to the cost of a collateralised or uncollateralised replacement transaction, in circumstances in which the determining party was unable at the time either to recover its original collateral from a third party custodian or to borrow alternative collateral.


The gulf between the parties is, on any basis, enormous. The Defendants made the determination that a close-out payment was due to them from the Claimant of €411.13 million (plus interest and costs). The Claimant disputes the validity of the determination, and contends that if the determination had been performed on the correct basis, it would have been due a payment from the Defendants of between €141.56 million and €167.92 million (plus interest and costs).

The Parties

The Claimant


The Claimant, Lehman Brothers Finance A.G. (“LBF”), is a Swiss company, whose core business consisted of the entry into OTC equity derivatives transactions. LBF was a member of the worldwide Lehman Brothers group of companies whose ultimate U.S. parent company was Lehman Brothers Holding Incorporated (“LBHI”). At the time they were entered into, the transactions in issue in this case represented the largest single stock OTC equity derivatives transactions ever executed by an entity in the Lehman Brothers group in Europe.


The bankruptcy of LBHI in 2008, which precipitated the collapse of the entire Lehman Brothers group, marked the beginning of LBF's descent into bankruptcy. On 30 September 2008, the Swiss Federal Banking Commission ordered that LBF become subject to its supervision, and appointed PwC Switzerland as its investigating agent. This meant that all executive functions passed from LBF's board to PwC Switzerland. On 29 October 2008, the Swiss Federal Banking Commission issued an order that LBF be liquidated, and appointed PwC Switzerland as the Liquidator. Finally, on 19 December 2008, and after PwC's conclusion that a successful restructuring of LBF would not be possible, the Swiss Federal Banking Commission ordered that the liquidation proceedings be converted into a bankruptcy on 22 December 2008.

The Defendants


The Defendants are German entities established by the late Dr. Klaus Tschira, one of the co-founders of the German multinational software company, SAP SE (“SAP”). Klaus Tschira Stiftung GmbH (“KTS”) is a not-for-profit charitable organisation (structured as a limited liability company with tax-exemption due to its charitable status), which funds projects seeking to advance natural sciences, mathematics, computer science and technology. Dr H C Tschira Beteiligungs GmbH & Co KG (“KG”) is an investment vehicle (structured as an incorporated partnership) set up to hold financial investments for the Tschira family. The Defendants' principal assets are very large volumes of shares in SAP. The Tschira family investments, including those of the Defendants, are managed by Aeris Capital AG (“Aeris”), a Swiss company incorporated for this purpose. The relevant individual at Aeris responsible for the transactions in issue in this case was Mr. Bernd Kammerlander (“Mr. Kammerlander”).


In order to manage their exposure to the risk of falls in the price of SAP stock, the Defendants entered into a number of hedging arrangements in respect of their SAP shares. In particular, the Defendants entered into four collateralised equity derivative transactions with LBF in 2007 and 2008, which are the subject of this claim.

The Transactions

The Variable Forward Sales


In May 2007, the Defendants each entered into a collateralised hedge transaction with LBF, known by the parties as the “Variable Forward Sales” or “VFS”. The transactions consisted of a “collar” of put and call options in respect of 59 million SAP shares, which effectively provided the Defendants with protection against the price of the SAP shares falling below a specified floor, whilst requiring them to forgo the benefit of any increase in the price of SAP shares above a specified cap.


The Variable Forward Sales were divided into 45 tranches of SAP shares. Each tranche was allocated a different valuation date (the KTS tranches matured between 30 January 2012 and 15 February 2013, and the KG tranches matured between 14 April 2014 and 6 May 2015). On the relevant valuation date, if the price of SAP shares was equal to or below the put strike-price, the relevant Defendant was entitled to require LBF to purchase that tranche for an amount equal to the put strike-price. Conversely, if the price of SAP shares was greater than the call strike-price, LBF was entitled to require the relevant Defendant to sell that tranche to it for an amount equal to the call strike-price. The put strike-prices for the Variable Forward Sales were set ultimately at €29.38 in the case of KTS and €30.035 in the case of KG. The call strike-prices were set at €55.70 in the case of KTS and €56.355 in the case of KG.


The Defendants each agreed to pay LBF a premium (referred to in the confirmations as a “Final Amount”) for entering into the Variable Forward Sales, which was calculated using a specified formula. The KTS premium was ultimately set at €50,510,830 and the KG premium at €66,845,365 (the “Premiums”). Payment of the Premiums was agreed to be deferred until the maturity of the Variable Forward Sales.

The Collateral


The Defendants' obligations to LBF under the Variable Forward Sales were secured by the provision by KTS and KG of collateral of a total of 59 million SAP shares (the “Collateral”). LBF could not hold such Collateral in its own name and the Defendants did not wish to transfer title to such a large proportion of the issued share capital of SAP. Accordingly, arrangements were made for the Collateral to be held on behalf of the Defendants in segregated custody accounts by Lehman Brothers International Europe (“LBIE”), the main UK subsidiary of the Lehman Brothers group.


The custody arrangements were documented pursuant to the terms of a Master Custody Deed (“MCD”) which was entered into by each of the Defendants with LBIE and LBF. Under each MCD, the Collateral remained at all times the property of the Defendants, but was subject to a charge in favour of LBF to secure the Defendants' obligations under the Variable Forward Sales. The MCDs were required by the confirmations for the Variable Forward Sales to be entered into on or prior to the Trade Date and were identified as a Credit Support Provision.

The Variable Forward Purchases


In April 2008, the Defendants entered into two conditional transactions known by the parties as the “Variable Forward Purchases” or “VFP”.


Like the Variable Forward Sales, the Variable Forward Purchases consisted of collars of put and call options. The Variable Forward Purchases were divided into 45 tranches with the same valuation dates as the corresponding tranches as in the Variable Forward Sales, and with the same strike prices as the Variable Forward Sales. The number of SAP shares to which the Variable Forward Purchases related varied according to a formula but was eventually fixed at 26.2% of the shares which were subject to the Variable Forward Sales. However, the rights and obligations of the parties were reversed, so that the put options were granted to LBF and the call options were granted to the Defendants. This meant that the Variable Forward Purchases were seen by the parties as capable of operating – at least in financial terms — as a partial reversal or “unwind” of the Variable Forward Sales.


Unlike the Variable Forward Sales, however, the Variable Forward Purchases were conditional in that they included a “down and in” feature. A “barrier” SAP share price was created for each tranche, at increments of €0.07 between €25 and €28, which was below the put strike price. The settlement conditions in effect provided that LBF's put option could only be exercised if the SAP share price had traded below the “barrier” set for that tranche at any...

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