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Andy McGregor

Banking and finance

Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd (formerly Anglo Irish Bank Corp Ltd). [2012] EWHC 2090 (Ch). Briggs J. 27 July 2012

The technique used by the issuers of corporate bonds known as exit consent was no more than a coercive threat which the issuer invited the majority to levy against the minority and its only function was intimidation. It could not be lawful for the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriated the minority’s rights under their bonds for a nominal consideration.

Judgment for claimant

Assenagon sought a declaration as to the legality of a technique used by the issuers of corporate bonds known as exit consent. Exit consent occurred where the bond issuer wanted all the holders of a bond issue to exchange their bonds for replacement bonds on different terms.

The holders were all invited to offer their bonds for exchange, but on terms that they were required vote at a bondholder’s meeting for a resolution amending the terms of the existing bonds so as to damage or destroy the value of the right arising from them. That resolution was known as an exit consent.

A holder who failed to offer his bonds for exchange and voted against the resolution or abstained took the risk, if the resolution was passed, that his bonds would be either devalued, or as in the instant case, be destroyed by being redeemed for a nominal consideration. The claimant’s challenge to the exit consent technique was based on an alleged abuse by the majority shareholders of their power to bind the minority, albeit at the invitation of the issuer. The terms of the bond issue to which the dispute related were contained in a trust deed. Following a noteholders’ meeting and an exit consent resolution Assenagon Asset Management SA had redeemed its €17m (£13.5m) worth of notes for a payment by the defendant bank of €170.

The claimant contended that the resolution constituted the conferral on the defendant bank to expropriate the notes for no more than a nominal consideration and that it was ultra vires the power of the majority; at the time of the noteholders’ meeting all those noteholders who voted in support of the resolution held their notes beneficially, and that those votes should be disregarded; the resolution constituted an abuse of the power of the voting majority because it conferred no conceivable benefit or advantage on the noteholders as a class and it affected the notes of the minority who had not agreed to vote in favour of the resolution such that it was both oppressive and unfair.

Judgment for claimant.

The resolution gave the bank an unqualified right to do away with the rights of the noteholders.

Under the provisions of the trust deed the noteholders must be taken to have assented to the exercise of a power in the majority to bind the minority to a cancellation of the principal payable on the notes and of the minimum interest payable thereon. That would be tantamount to forfeiture, confiscation or expropriation of the rights conferred by the notes, which conferred nothing of benefit on the noteholders other than repayment of principal and payment of interest.

The notes offered and accepted for exchange were held for the defendant’s benefit. Those notes were held under contracts for sale between the relevant majority noteholders and the bank and those contracts were specifically enforceable.

The purpose of the contracts for the exchange of the notes was to terminate the market for the notes and bring about a complete cancellation or redemption of the entire issue for the purposes of the bank’s restructuring so as to meet conditions imposed by the Government for the provision of rescue funding at the expense of the taxpayer. It was clear that damages for breach of a contract would not be an adequate remedy for the defendant.

It could not be lawful for the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriated the minority’s rights under their bonds for a nominal consideration. The exit consent was a coercive threat which the issuer invited the majority to levy against the minority. Its only function was intimidation. That form of coercion was entirely at variance with the purposes for which majorities in a class were given power to bind minorities, and it was no answer for them to say that it was the issuer who had invited them to do so,.

For the claimant Assenagon

Richard Snowden QC, Erskine Chambers

Ben Griffiths, Erskine Chambers

Helen Mulcahy, consultant, Hill Hofstetter

For the defendant Irish Bank Resolution Corp

Robin Dicker QC, South Square

Tom Smith, South Square

Nick Stern, counsel, Freshfields Bruckhaus Deringer

Commentry: Andy McGregor

While it is true that exit consent procedures attracted limited interest in published professional comment prior to this judgment, the question of whether there are limits to the exit consent technique has long been a contentious subject among finance lawyers.

Given the extent of the provision for the use of the technique in the context of structured bonds, and the prevalence of restructurings arising from the financial crisis, it is to be welcomed that for the first time its legality has been tested under English law.

Briggs J’s judgment provides helpful guidance with regard to the reasonableness of the penalties that can be imposed on note or bondholders who vote against restructuring exchange proposals. That said, it must be recognised that this case concerned an extreme example.

There is clearly a fine line between an illegitimate, coercive, exit consent mechanism that threatens an expropriation of the holdings of those who vote against a restructuring proposal, and a legitimate one that offers the minority a chance to obtain substantially equivalent value for their securities if they fail in their attempt to vote down such a proposal.

This case does not signal the end of the use of the exit consent procedure as a powerful tool in the world of restructuring, but it does give a clear indication that the process has to be used in a manner that bears at least some resemblance to reasonableness.

Andy McGregor, partner, RPC