Assenagon Asset Management S.A. v Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank Corporation Limited) [2012] EWHC 2090 (Ch)

The term “exit consent” refers to a technique used by corporate bond issuers to have bondholders take losses. It has been in use for some time and a previous court challenge to its application to a bond governed by New York law failed in 1986. In the present Anglo Irish Bank case, the English High Court came to an opposite view. The judgment is likely to have far-reaching implications for bond or other debt restructuring exercises under English law.

Exit Consent

The technique of exit consent is employed when an issuer wishes to persuade all its bondholders to accept an exchange of their existing bonds for replacement bonds on less advantageous terms. The bondholders are invited to offer their bonds for exchange, but are required to commit themselves irrevocably to vote in favour of amending the terms of their existing bonds to less advantageous terms. A bondholder who does not offer his bonds for exchange and either votes against or abstains from voting on the resolution takes the risk (if the resolution is passed) that his existing bonds will be worthless.

In the United States in Katz v Oak Industries Inc. (1986) 508 A 2d 873, the attachment of an exit consent was challenged as amounting to a breach of the contractual obligation of good faith owed by an issuer to bondholders. The court rejected this argument and appeared to regard the matter as an ordinary commercial arms-length contract.

Anglo Irish Bank

In the present Anglo Irish Bank case, Assenagon Asset Management S.A. (a bondholder) alleged that there was an abuse by the majority bondholders of their power to bind the minority, albeit at the invitation of the issuer. The principle is that the majority’s powers to bind the minority must be exercised bona fide in the best interests of the class of bondholders as a whole, and not in a manner which is oppressive or otherwise unfair to the minority.

The bonds in question were subordinated floating rate notes issued by Anglo Irish Bank. These notes were to mature in 2017 for redemption at par unless earlier redeemed by the bank at par. They carried a floating rate of interest at 0.25% above the 3-month Euribor rate until 2012, and 0.75% above the 3- month Euribor rate thereafter. The notes were unsecured and subordinated, so as to be prioritised for payment in an insolvency after all secured and unsecured creditors (including the bank’s depositors) and ahead only of equity shareholders. The trust deed constituting the notes was governed by English law and subject to the jurisdiction of the English courts.

The terms of the bank’s exchange offer were that the exchanging bondholder would be offered €0.20 in nominal value of new notes for every €1 in nominal value of existing notes exchanged. In connection with the exchange offer, the bank also proposed an extraordinary resolution, to be sanctioned at a subsequent meeting of bondholders, which would modify the conditions of the existing notes to give the bank the right to redeem the existing notes following completion of the exchange offer at an amount equal to €0.01 per €1,000 in principal amount of the notes. It was a condition to a bondholder’s ability to participate in the exchange offer that he voted in favour of the extraordinary resolution.

Upon completion of the exchange exercise, and the passing of the extraordinary resolution, the bank exercised its rights to redeem the remaining existing notes. Assenagon did not attend nor vote by proxy at the bondholders’ meeting and saw its €17 million in value of existing notes redeemed by the bank for €170, which led to the present claim.

The English High Court’s Judgment

The English High Court allowed Assenagon’s claim and held that the exchange process carried out by the bank was unlawful. It was also held that the majority bondholders who had, prior to the meeting, exchanged their old notes for the new notes, held their old notes for the benefit or account of the bank, and under the terms of the old notes, their votes on the extraordinary resolution were therefore invalid.

The Court held that the extraordinary resolution in question could not be described as being of any conceivable benefit to the bondholders: “[t]he exit consent is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less. It’s only function is the intimidation of a potential minority, based upon the fear of any individual member of the class that, by rejecting the exchange and voting against the resolution, he (or it) will be left out in the cold.”

The Court further held that this form of coercion was entirely at variance with the purposes which majorities in a class are given powers to bind minorities, and was both oppressive and unfairly prejudicial to the minority.

Implications of Judgment

As matters stand, bondholders and bond issuers with notes governed by English law should be alive to the issues raised in the Anglo Irish Bank case and be guided by them in their bond or debt restructurings. Issuers may wish to consider the feasibility of using exit consent mechanisms and English law to govern their bond instruments.

While the judgment is in relation to exit consents in the context of bond issues, the underlying principle laid down by the English High Court that the exercise by a majority of its binding powers must be exercised bona fide in the best interests of the class as a whole may have far-reaching application in other genres of restructuring meetings and resolutions where a stipulated majority is empowered by statute or contract to bind the minority.

The judgment in the Anglo Irish Bank case is not binding on the Singapore courts, and it remains to be seen whether our courts will adopt a similar approach.