It was inevitable that a financial system collapse like that of Ireland would eventually start to produce some acrimonious litigation, particularly litigation related to the spectacular loss of value in the now state-supported banks. Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank Corporation Limited)  EWHC 2090 (Ch) is such a case. In Assénagon, the High Court in London was asked to defend the rights of a minority bondholder against an Irish bank seeking to use the so-called “exit consent” technique to remove or limit the bondholder’s rights. In a surprising decision by a leading jurist, the High Court ruled in favor of the minority bondholders. As a result, the not uncommon practice in Great Britain of limiting minority rights through the use of “exit consents” may be at serious risk.
For the first time, the Assénagon decision squarely tests the legality of what has become known as an “exit consent,” a technique used in Great Britain by which a note issuer forces noteholders to agree to devalue their notes in the face of a threat to cram them down for minimal value. The decision is of particular significance as the presiding judge is Mr. Justice Briggs, one of the most respected judges in Great Britain presiding over financial cases. The background facts of the case are noteworthy.
Assénagon, a manager of two Luxembourg based funds, acquired €17million of notes in the period between September 2009 and April 2010 at a time when Anglo-Irish Bank, now Irish Bank Resolution Corporation, the issuer of the old notes, was in financial distress. The old notes, due in 2017, were acquired by Assénagon at the prevailing prices for this distressed debt of between €0.418 and €0.42 per nominal Euro.
In October 2010, the Irish Bank announced that it was offering noteholders the chance to exchange old notes for new notes. The new notes would be valued at €0.2 per Euro of original value, were due in December 2011 and provided a coupon of 3.75% above three month Euribor. The Irish Bank’s announcement made it clear that meetings of noteholders would be held to (a) approve this conversion and (b) provide the Irish Bank with the power to convert, should it wish, some old notes to a minimal value set at €0.01 per €1,000. (Such a conversion of minority bondholder interests was permitted pursuant to the terms of the Trust Deed if (assuming a “quorum” participated) a three-quarters majority of the bondholders, whether agreeing to the modifications or not, agreed.) Noteholders were invited to agree in advance of a meeting of bondholders to the exchange. However, should a noteholder not exchange its old notes in advance of the meeting, it would run the risk that it would no longer be able to exchange its old notes at all, and thus would be left with the minimal exchange value.
A vast majority of the noteholders (satisfying all quorum and majority requirements in the Trust Deed) exchanged their old notes for the new notes. However, Assénagon did not attend or vote by proxy at the meeting of the noteholders. On November 30, 2010, the Irish Bank asserted its new found right to redeem the non-consenting old notes, thus resulting in a return to Assénagon of just €170 for its holding of €17million.
Key Legal Arguments
In its challenge to the legality of the exit consent, counsel for Assénagon asserted three issues:
- that the proposed resolution was an ultra vires act (that is, an act beyond the power of the majority as it conferred a power on the Irish Bank to expropriate the old notes for a nominal consideration);
- that an advance agreement to vote in favor of the resolution meant that the old notes were being held for the benefit of the Irish Bank and thus, pursuant to the terms of the Trust Deed, were not entitled to be voted; and
- that the resolution was an abuse of the voting power of the majority (effectively, the Irish Bank) because it conferred no benefit on the noteholders as a class.
The judgment of Mr. Justice Briggs considered principles going as far back as Justinian’s Roman Law Institutes but updated the law with an analysis of prevailing trends and case law. The cornerstone of his decision, from which the outcome seemed to flow, was the following extract from the judgment of Viscount Haldane in British America Nickel Corporation Ltd v MJ O’Brien Ltd  AC 369:
there is, however, a restriction on such powers [to modify] when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only.
With respect to the first key issue, Mr. Justice Briggs described the ultra vires argument made by Assénagon’s counsel as a “powerful submission.” It was argued that the provision in the Trust Deed on abrogation of power effectively authorized a complete abandonment of the rights of those noteholders who had not agreed to the exchange. In reaching his conclusion, Mr. Justice Briggs examined the wording of the Trust Deed that required a two-thirds quorum and a three-quarters majority of that quorum to pass a resolution of the kind proposed. Given the specific clear language at issue, Mr. Justice Briggs said he felt forced to find in favor of the Irish Bank because the requirement of a high majority meant that the noteholders had assented to reducing or cancelling the principal and interest payable in respect of the old notes. Despite what he seemed to believe was clear language in the Trust Deed, Mr. Justice Briggs still emphasized that he reached his decision by a “narrow margin.”
Mr. Justice Briggs then turned to the second key issue: Assénagon’s counsel’s submission that the decision by noteholders to offer their old notes in exchange for the new notes meant that the votes were held at the direction and at the order of the Irish Bank and that, as a result, the Irish Bank was beneficially the owner of the old notes. If true, the Trust Deed specifically provided that the Issuer could not vote.
Mr. Justice Briggs ruled that the old notes which had been offered and accepted for exchange were held for the benefit of the Irish Bank at the time of the meeting. Accordingly, the votes by the tendering noteholders could not be counted under the terms of the Trust Deed, making the noteholder vote in favor of the “exit consent” meaningless.
Finally, on the subject of the third key issue, abuse of power, Mr. Justice Briggs accepted that there was a risk that any decision on the propriety of exit consents might have a wider impact in the bond market, even in situations where there was not such a significant expropriation of the rights of a minority. He also recognized the assertion by the Irish Bank’s counsel that, in several decided cases, proper disclosure of an inducement to accept had defeated an objection. However, he was able to distinguish these cases on the grounds that it was possible to analyze their facts and conclude that the proposals were capable of benefitting the whole class.
Ultimately, Mr. Justice Briggs focused on the rights of the minority against the majority, stating that “oppression of a minority is of the essence of exit consents of this kind, and it is precisely that at which the principles restraining the abusive exercise of powers to bind minorities is aimed.” Mr. Justice Briggs explained that the new notes were not a financial inducement to vote in favor of the resolution but rather a negative inducement to deter noteholders from voting against the proposed exchange. He held that it could not be lawful for “the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority’s rights under their bonds for a nominal consideration.” The exit consent, he continued, “is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less.” For this reason, Mr. Justice Briggs found in favor of Assénagon.
The Assénagon decision found that the process followed in this instance negated otherwise valid votes and, more globally, that a taking of value from the minority without fair compensation was fundamentally unfair and improper (especially when the taking was by the majority). As a result of its tenacity, Assénagon may have put an end to the previously common “exit consent” technique.
The Assénagon case will clearly have a strong impact on any form of process by which debt is due to be compromised, including all forms of restructurings and perhaps techniques used in a Company Voluntary Arrangement (a UK species of reorganization). What makes it all the more remarkable in this case is that the inducement being offered, although entailing a significant write-down of the debt, was arguably to the advantage of the noteholders; it would have shortened the term of their debt from seven years to two, the debt would no longer be subordinated and the debt would attract a significant coupon. The new notes would also be priced at roughly the current market price of those being exchanged and, moreover, would be guaranteed by the Irish Government (subject to the condition of acceptance).
It is understood that Irish Bank Resolution Corporation is to appeal the Assénagon judgment. We will monitor the appeal to find out whether exit consents survive in Great Britain.