Al Sadik v Investcorp Bank BSC and Others
| Jurisdiction | UK Non-devolved |
| Judge | Lord Briggs |
| Judgment Date | 18 June 2018 |
| Neutral Citation | [2018] UKPC 15 |
| Docket Number | Privy Council Appeal No 0001 of 2017 |
| Court | Privy Council |
| Date | 18 June 2018 |
[2018] UKPC 15
Lord Wilson
Lord Sumption
Lord Reed
Lord Hughes
Lord Briggs
Privy Council Appeal No 0001 of 2017
From The Court Of Appeal Of The Cayman Islands
Company Law - Shares — Share purchase agreement — Breach of contract — Whether transfer and leverage of balance of monies of appellant represented breaches of share purchase agreement by defendants — Appeal dismissed.
Appellant
Michael Black QC Marcus Staff (Instructed by Clyde & Co LLP)
Respondents
Lord Falconer of Thoroton Edward Levey (Instructed by Gibson Dunn & Crutcher LLP)
JUDGMENT GIVEN ON
This appeal from the Court of Appeal of the Cayman Islands is about leveraged investment in hedge funds. In this context, leverage means using borrowed money to increase the potential return on an investment. Thus, a return of 10% on a simple investment of US$100 will result in a net asset value of US$110. However, if the US$100 is invested at what is called “2x leverage” the amount invested is US$300 (ie US$100 plus borrowing of US$200). A 10% return on that investment will result in a net asset value of US$130 (ie US$330 less the loan of US$200). Thus, leaving aside borrowing costs, the application of 2x leverage to the original investment increases the return from 10% to 30%. But of course, losses on the underlying investment will also be increased by the use of leverage in the same proportion, generating in the example above a loss of 30% (plus borrowing costs) if the underlying investment loses 10% in value.
The leveraging of investment in hedge funds may be achieved, broadly speaking, in three ways. First, the investor may simply choose a hedge fund with its own internal element of leveraging. Secondly the investor may invest in one or more feeder funds, which are used as leveraging vehicles for multiple investors so as to increase the amount invested in the underlying hedge funds. Thirdly, the investor (or his investment managers) may set up a bespoke vehicle (or “SPV”) for the specific purpose of his own leverage, whereby the SPV borrows against the asset represented by its investment in one or more hedge funds, usually on non-recourse terms which limit the lender's right to repayment to the amount derived from realising the pledged assets.
The appellant Mr Riad Tawfiq Al Sadik is a very wealthy, very experienced businessman, resident in Dubai. By 2007 his company Al Habtoor Engineering Enterprises LLC had become the largest construction and engineering company in the United Arab Emirates, with over 40,000 employees. In the course of a merger between Habtoor and an Australian company in 2007, Mr Al Sadik sold 45% of his shares in Habtoor for AED1.2 billion.
By the end of 2007 Mr Al Sadik was considering investing a substantial proportion of that sum in a hedge fund strategy promoted by the first respondent Investcorp Bank BSC (“Investcorp”) which was (and remains) an international investment firm, with offices in Bahrain, London and New York. On 28 January 2008 representatives of Investcorp presented Mr Al Sadik with a written proposal for investment (“the Investment Proposal”). This outlined a strategy for the investment of AED1 billion in three Investcorp funds. 50% was to be invested in the Leverage Diversified Strategies Fund Ltd SPC (“LDSF”) at 3x leverage. The remainder was to be invested in two blocks of 25% each in Single Managers Fund Ltd SPC (“SMFCo”) at 1x leverage and in Leveraged Event Driven Fund (“LEDF”) at 1x leverage. The Portfolio Objectives identified in the Investment Proposal included a target return of 45%+ over a three-year investment horizon. The Investment Proposal made it clear that the amount of leverage within the portfolio might change from time to time, but the aggregate initial leverage would be 2x: ie borrowing an additional AED2 billion in excess of the initial investment of AED1 billion. Each of LDSF, SMFCo and LEDF were, for leverage proposes, broadly equivalent to feeder funds as described above, so that the leverage method implicitly described in the Investment Proposal was the second of those outlined in para 2 above. Those three funds were available for investment by numerous Investcorp customers.
In the event, Mr Al Sadik decided only to invest AED500m (US$136m odd) with Investcorp pursuant to a written Share Purchase Agreement (“the SPA”) dated 1 March 2008 and made between him and (1) Investcorp (2) Investcorp Nominee Holder Ltd and (3) Shallot IAM Ltd (“Shallot”).
The meaning of the SPA is a core issue in this appeal. It is convenient to set out its relevant provisions at this stage. “I/We” means Mr Al Sadik.
“ Clause A
PURPOSE
I/We have requested Investcorp Bank B.S.C. (‘Investcorp’) to establish a separately managed account (the ‘Investment Account’), which will invest in certain hedge funds or segregated accounts with any hedge fund managers selected by the Investment Manager (as defined below), including, but not limited to, any Investcorp hedge fund (whether an Investcorp Fund of Hedge Funds, an Investcorp Single Manager Fund or any other Investcorp hedge fund product (any of the foregoing, an ‘Investcorp Hedge Fund’) or a hedge fund or a segregated account with any other hedge fund manager; provided, however that any such other hedge fund manager is at the time of investment a manager with which an Investcorp Hedge Fund is invested. The Investment Account will be established as a special purpose vehicle, Shallot IAM Limited which will be incorporated under the laws of the Cayman Islands (the ‘Company’). All assets of the Company are hereafter referred to as the ‘Assets Under Management’ and each hedge fund or segregated account in which Assets Under Management are invested is hereafter referred to as an ‘Underlying Investment’. To the extent that Assets Under Management are invested in any Investcorp Fund of Hedge Funds, such investment will be made in non-fee bearing shares.
Clause D
ACTIONS TO BE TAKEN PRIOR TO ACCEPTANCE OF SUBSCRIPTION
In contemplation of my/our investment, and as a condition precedent to the final acceptance thereof, I/we understand and agree that the following actions shall be taken:
1. The Company will enter into (a) an Investment Management Agreement (the ‘Management Agreement’), pursuant to which the Company will appoint Investcorp Investment Advisers Limited (‘IIAL’ or the ‘Investment Manager’) as its sole and exclusive manager in respect of its acquisition, holding and disposition of its corporate assets. I/We understand that I/we may receive a copy of the Management Agreement upon written request to Investcorp.
2. The initial shareholder of the Company has elected the directors of the Company, who will continue to serve as directors of the Company until their successors are duly elected. I/We understand that the incumbent directors will have the power to fill any vacancies on the Company's board of directors. I/We further understand that the Company's board of directors will authorize or otherwise cause the Company to take any actions that the board believes are necessary or desirable in order to effectuate the purposes of this investment or otherwise manage the affairs of the Company.
Clause F.4
CALCULATION OF NET ASSET VALUE; REPORTS
4. A monthly statement of the Underlying Investments will be issued as soon as practicable after estimated net asset values have been received from all of the Underlying Investments or their administrators.
Clause H
REDEMPTION OF COMPANY SHARES
I/We may some [ sic] or all of my/our Company Shares on the following terms:
1. I/We may redeem up to UAE Dirham 166,000,000 of the Company Shares at the end of any calendar quarter on not less than 60 days written notice.
2. I/We may redeem up to the remaining balance of the Company Shares, after the first anniversary of the initial investment, at the end of any calendar quarter on not less than 60 days written notice.
Clause I
BORROWING RELATIONSHIPS
In connection with my/our Investment, I/we understand and agree that the Company may be involved in certain borrowing relationships in accordance with the following terms:
1. The Company may borrow from third-party lenders, and in some cases from Investcorp, to meet possible temporary cash shortfalls and for other corporate purposes ‘Liquidity Borrowings’. The aggregate amount of Liquidity Borrowings shall not exceed 25% of the equity of the Company.
2. The Company will seek to ensure that any interest rate and/or fees payable in connection with borrowings from Investcorp will be substantially in accordance with market practice.”
As is apparent from Clause A of the SPA, Shallot was to be (and was) incorporated in the Cayman Islands, as a special purpose vehicle for handling Mr Al Sadik's investment, controlled by directors appointed by Investcorp. Mr Al Sadik had already paid AED500m to Investcorp in late February 2008. In early March it was converted to US$136m and credited to an account of Shallot. Contrary to Clause D1 of the SPA, Shallot did not appoint Investcorp Investment Advisors Ltd as Investment Manager (or anyone else) either then or for another year. Nonetheless Mr Al Sadik's investment was effectively managed by Investcorp, the requisite authority for that purpose from Shallot being provided by its directors, who were Investcorp appointees.
As it was entitled to do under the SPA, Investcorp had in the meantime decided not to proceed to invest Mr Al Sadik's money strictly in accordance with the Investment Proposal. Rather, it decided to split his investment between DSF (which was the hedge fund for which LDSF, described in the Investment Proposal, was the feeder fund) as to 50% and as to the balance between (initially) five single manager funds, for which SMFCo was, or was equivalent to, the relevant feeder fund. That decision did not...
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