It’s an intercreditor nightmare. A case involving Primacom, due to hit the German courts in September, is playing havoc with exclusive jurisdiction clauses and is threatening to derail cross-border restructurings in Europe.
For those not following the German financing market, Primacom is one of the smaller players in the telecoms landscape, serving 1.3 million customers across Germany and the Netherlands. Its market capitalisation is around €90m (£62.1m). Primacom is currently servicing two loans: a €375m (£258.7m) loan from its second secured lenders (SSLs) led by Apollo Management and a €500m (£345m) loan financed by Barclays Capital (BarCap) and Fortis Bank.
German firm Straub & Kollegen has kicked off a case on behalf of Primacom by taking the company’s SSLs to court in Germany, claiming that the interest rate on the €375m loan is too high. Primacom is now failing to meet the payments on this loan. The creditors include Apollo, which is being advised by Freshfields Bruckhaus Deringer finance partner David Ereira and JPMorgan, the latter in turn being advised by Linklaters partner Richard Bussell.
The breakdown between Primacom and its banks started last summer when its lenders offered the company a debt-for-equity swap. Although the majority of shareholders agreed the refinancing at a meeting last summer, the resolution required to proceed with the refinancing was not passed.
Over the same weekend, Primacom chief executive Wolfgang Preuss sacked the existing board and replaced it with a hand-picked group of people, a move that resulted in the banks withdrawing their offer.
The exclusive jurisdiction clause relating to the SSLs’ loan should have ensured that the case be heard in the UK courts. Despite this, Straub & Kollegen took its fight to the courts in Germany – a course of action that could have EU-wide repercussions.
The hostility between Primacom and the SSLs was evident in a press release issued by Apollo in December 2004, when the lawsuit was filed.
Apollo’s statement was unambiguous. It said: “In making this filing, Mr Preuss is remaining true to his reputation and is only worsening the chances of achieving a restructuring. A reasonable person would have concluded negotiations on a consensual restructuring months ago.”
Even lawyers – normally not the most outspoken individuals on workouts – have been prompted to speak out on Straub & Kollegen’s course of action.
Apollo’s lawyer Ereira goes even further than his client. “This is an appalling and abusive tactic,” he says.
Meanwhile, Ereira and his team have of course attempted to counter-sue in England, but are being thwarted by the Brussels Convention. Article 21 of the convention states that, where proceedings are launched in two different jurisdictions in relation to the same case, the court in which the later action is started must stay its proceedings pending the determination of jurisdiction by the first court.
Freshfields will therefore have to wait until next month, when the case comes to the Frankfurt court, to find out what happens next.
In theory, the German judge will have to refer the case to the English courts, but Ereira is not making any assumptions.
“I’m very confident that, if correctly decided, the German judge will have to pass this over to the English courts, but you can never be 100 per cent sure of any proceedings,” he argues.
At the very least, Primacom has bought itself some time by launching its claim against the SSLs in Germany, but Freshfields is not waiting until September. Instead the firm has made a series of counter-strikes by launching a number of separate actions in England, which are being defended by Primacom’s UK lawyers Baker & McKenzie (B&M), with partner Ian Jack leading the defence.
These include suing the SSLs for failing to deliver a report by Pricewaterhouse-Coopers on the financial state of Primacom. The lenders are claiming that Primacom is overindebted and that, under German law, a company has 21 days to declare insolvency. However, the final report, commissioned in September 2004, has still not been delivered.
Ereira’s team also secured an injunction in January this year to stop Primacom’s board selling the company’s Dutch subsidiary Multikabel.
But Freshfields is not alone in the bun fight with Primacom in the English courts. On the Multikabel issue, B&M must also contend with Clifford Chance, which is advising Primacom’s senior lenders BarCap and Fortis Bank. The Clifford Chance team, not wanting to be wrong-footed by Freshfields’ action, is being led by restructuring partner Mark Hyde.
Indeed, in the case of Multikabel, Freshfields and Clifford Chance are pitched against each other, with the senior lenders in favour of the sale of the subsidiary. It should be noted that Primacom is currently meeting its repayments on the e500m loan provided by BarCap and Fortis.
The case of Primacom is not the first to deal with an apparent breach of an exclusive jurisdiction clause. In the case of Erich Gasser v Misat (2003), an Austrian exclusive jurisdiction clause was ignored and proceedings were launched in Italy. The European Court of Justice (ECJ) held that the proceedings subsequently launched by the Austrian courts would have to be stayed pending determination by the Italian judiciary of its jurisdiction, even if this risked causing significant delay, and this action at least temporarily frustrated the intended effect of the exclusive jurisdiction clause.
Meanwhile, in the later case of Gregory Paul Turner v Felix Fareed Ismail Grovit, which centred around the bureau de change group Chequepoint, the ECJ, on similar grounds to its decision in Gasser, ruled that the Brussels Convention did not permit the jurisdiction of one court to be reviewed by a court in another member state.
Insolvency lawyers are watching the Primacom case closely, as is throws the tension between two different approaches to commercial transactions into the spotlight.
“On the one hand you have the UK approach, which has traditionally given precedence to contractual certainty, and on the other is a European view, which is about mutual trust between EU courts. Sometimes the two don’t align,” comments Andrew Dodd, a partner at DLA Piper Rudnick Gray Cary.
Ereira, Hyde and Dodd all agree one thing: the compound effect of Primacom and the earlier cases could lead to a tactical rush to court as companies seek a jurisdiction that will give them the most favourable outcome – even if that outcome means forcing the other side into a settlement to save both time and money.
For the time being, then, all B&M, Clifford Chance and Freshfields are waiting for is September. At the moment everything’s still to play for. But the hearing on 13 September could determine not just Primacom’s fate, but also the way that European cross-border restructurings are conducted in the future.