Strategic Value Master Fund Ltd v Ideal Standard International Acquisition SARL and Others
| Jurisdiction | England & Wales |
| Judge | THE HON MR JUSTICE LEWISON,Mr Justice Lewison |
| Judgment Date | 04 February 2011 |
| Neutral Citation | [2011] EWHC 171 (Ch) |
| Docket Number | Case No: HC10C02331 |
| Court | Chancery Division |
| Date | 04 February 2011 |
[2011] EWHC 171 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Before : THE HON MR JUSTICE LEWISON
Case No: HC10C02331
Mr Ewan McQuater QC & Mr Edmund King (instructed by Messrs Bingham McCutcheon LLP) for the Claimant
Mr David Wolfson QC & Mr Matthew Cook (instructed by Messrs Mishcon de Reya) for the Defendants
Hearing dates: 27 th & 28 th January 2011
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 Lewison :
Introduction
The Ideal Standard group manufactures and sells bathroom furnishings, fixtures and shower enclosures for residential, commercial and institutional buildings. It employs some 12,000 people in over 20 countries worldwide. It is owned, through Ideal Standard International Acquisition SARL ("the Company"), by private equity funds that are advised by Bain Capital Ltd ("Bain Capital") and its affiliates. The Company is incorporated in Luxembourg.
In 2007, Bain Capital sponsored the acquisition of Ideal Standard by the Company which was newly incorporated for that purpose; and, as part of that transaction, the Company entered into the Senior Facilities Agreement ("SFA") dated 3 October 2007. A number of companies within the Ideal Standard group were parties to it. They were incorporated in various jurisdictions; including Bulgaria, France, Japan, Korea, the USA, Egypt, Germany, Greece and Spain. Under the SFA, Bank of America NA and Banc of America Securities Ltd (collectively "Bank of America") and Credit Suisse International ("Credit Suisse") agreed to lend money to the Company and other members of the Ideal Standard group. Other lenders participated in the loan, among them Strategic Value Master Fund Ltd ("SVMF"). Between them Bank of America and Credit Suisse held two thirds of the loan. This made them "Majority Lenders" as defined by the SFA. SVMF holds interests in approximately 10 per cent of the loan. Following most of the events covered by the declarations sought in this litigation Bank of America and Credit Suisse sold their interests in the loan to two companies connected with Bain Capital. These two companies are the second and third defendants. Before the sale Bank of America and Credit Suisse had asserted that Events of Default had occurred under the SFA such as to entitle them to serve notice accelerating the loan. Following the sale the second and third defendants have purported to withdraw that notice and to have waived such Events of Default as might previously have occurred. The Company, however, denies that the alleged Events of Default occurred.
SVMF seek declarations to the effect that the Events of Default did indeed occur and that the purported withdrawal of the notice and waiver of the Events of Default were ineffective.
Mr Ewan McQuater QC and Mr Edmund King presented the case for the claimant. Mr David Wolfson QC and Mr Matthew Cook presented the case for the defendants.
The SFA
The SFA is clearly a professionally drawn instrument. Excluding its Schedules it runs to 161 single spaced pages. It begins with a number of pages of definitions and general provisions. I will refer to them as necessary. Clause 1.2 (e) says that "… headings in this Agreement do not affect its interpretation".
The amount of the loan was divided into a number of different categories:
i) Facility A, amounting to $150,000,000;
ii) Facility B, amounting to $910,000,000;
iii) The Acquisition Facility, amounting to $75,000,000;
iv) A Revolving Credit Facility, amounting to €79,000,000-odd.
Clause 2.8 provides:
"Unless all the Finance Parties agree otherwise:
(a) the obligations of a Finance Party under the Finance Documents are several;
…
(d) the rights of a Finance Party under the Finance Documents are separate and independent rights;
(e) a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights…"
Clause 3 of the SFA set out the purposes for which each category of loan could be used. Clause 10 set out how each of the loans was to be repaid. Facility A was to be repaid in six monthly instalments over a period which began six months after the acquisition of the Ideal Standard group and ended seven years after the acquisition. Facility B was to be repaid in two instalments: 50 per cent on the seventh anniversary of the acquisition; and the remainder on the eighth anniversary of the acquisition. The Acquisition Facility was to be repaid on the seventh anniversary of the acquisition. The Revolving Credit was to be repaid at dates determined in accordance with clause 13. Each loan carried interest at a margin above LIBOR; or, in the case of a loan in Euro, EURIBOR. The margin varied depending on the ratio of net debt to EBITDA. But margin applied at the highest rate specified in the SFA while an Event of Default was continuing.
Clause 22 contained a number of financial covenants. Clause 22.2 contained a covenant by the Company to ensure that the ratio of Total Net Debt (as defined) to EBITDA (as also defined) would not exceed the ratio shown in a table contained in that clause. That ratio decreased over time. It also contained a covenant by the Company that the ratio of EBITDA to interest costs would be or exceed the ratio shown in another table contained in that clause. That ratio increased over time. Thus these undertakings, if met, would ensure that the Company became progressively less leveraged over time; and that its interest cover progressively increased over time.
EBITDA is a common acronym standing for "earnings before interest, taxes, depreciation and amortisation". It is itself the subject of an elaborate definition in the SFA which describes it as "the consolidated profits of the Group from ordinary activities" after various adjustments (both positive and negative).
Whether these undertakings were met was to be tested at periodic intervals. If the Company was in breach of these undertakings, clause 22.5 enabled it to cure a breach by exercising what the SFA calls the Equity Cure Right. The clause begins as follows:
"if the requirements of any financial undertaking set out in clause 22.2 … are not met in respect of a Relevant Period, the cash proceeds (" Cure Amount") received by the Company pursuant to any New Equity (" Cure Subscription") or additional Subordinated Debt (" Cure Loan") invested in the Company for the purpose of curing such breach shall be included in a recalculation of such financial undertaking by making a pro forma adjustment to EBITDA (solely for the purpose of ascertaining compliance with the financial undertaking and not for any other purpose) such that (x) EBITDA for such Relevant Period is increased by an amount equal to the Cure Amount and (y) the Cure Amount does not count as cash to be deducted in calculating Total Net Debt."
If the recalculation has the effect that the financial undertakings are met, then they are deemed to have been satisfied on the relevant test date. Clause 22.5 goes on to say:
"(c) the relevant Cure Amount shall be added to and considered to be part of EBITDA solely for the purpose of ascertaining compliance with the financial undertaking as at the end of the Relevant Period … and as at the end of the next three following Relevant Periods;
(d) not more than five Cure Subscriptions or Cure Amounts may be applied to increase EBITDA during the life of the Facilities and no Cure Subscriptions or Cure Amounts may be applied consecutively;
(e) Cure Subscriptions or Cure Amounts may not be made more than twice in any Financial Year"
Clause 23 contains a number of general covenants. They include clause 23.13 which provides, so far as material:
"The Company shall not declare, make or pay dividends or pay any management, advisory or other fee to or to the order of any of the shareholders of the Company."
There are exceptions to this general prohibition, which are irrelevant for present purposes. Clause 23.18 provides, so far as material:
"The company shall not trade, undertake commercial activities, own any assets or incur any liabilities except for:
(a) business as a holding company;
(b) normal treasury and holding company activities …"
Clause 24 defines Events of Default. These include non-payment of amounts due. They also include breaches of other obligations, defined as follows:
"An Obligor or (sic) does not comply with any term of the Finance Documents (other than … Non-payment), unless the non-compliance:
(a) is capable of remedy; and
(b) is remedied within 20 Business Days of the earlier of the Facility Agent giving notice of the breach to the Company and any Obligor becoming aware of the non-compliance,
in each case, without prejudice to the provisions of Clause 22.5 (Equity Cure)."
Insolvency is also an Event of Default. This is dealt with by Clause 24.6 which so far as relevant reads:
"Any of the following occurs in respect of a Material Company:
(i) it is, or is deemed for the purposes of any applicable law to be, unable to pay its debts as they fall due or insolvent;
(ii) it is over-indebted; or
(iii) it admits its insolvency or its inability to pay its debts as they fall due …"
Clause 24.18 deals with acceleration of the loans. It reads, so far as relevant:
"On and at any time after the occurrence of an Event of Default which is continuing the Facility Agent may, and shall if directed by the Majority Lenders by notice to the Company:
(a) cancel the Total Commitments …and/or
(b) declare that all parts of the Utilisations, together with accrued...
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