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

Summary

The legality of a technique known as "exit consent" has been tested by the High Court.  The court held that the use of a resolution by the majority of noteholders to amend the terms of existing notes was an abuse of the majority's power to bind the minority and the exit consent was therefore unlawful.

Background

An "exit consent" is the term used for a process whereby an issuer invites all noteholders to accept an exchange of their bonds for replacement bonds on different terms.  As a condition of the exchange, noteholders are required to commit themselves to vote at a bondholders meeting for a resolution amending the terms of the existing bonds so as to seriously damage or destroy the value of those bonds which are not exchanged. Noteholders who do not accept the offer are therefore at risk that the majority will accept and vote to decrease the value of the exiting notes to a nominal amount.

On 15 June 2007, Anglo Irish Bank Limited (the "Issuer") issued subordinated floating rate notes with a nominal amount of €750 million due in 2017 (the "Notes") under a trust deed dated 15 August 2001 (the "Trust Deed").  The Trust Deed provided for the majority of noteholders to approve any compromise or modification of the noteholders rights by way of extraordinary resolution but prohibited the Issuer or any subsidiary from being entitled to vote at any meeting in respect of notes beneficially held by it or for its account.

In late 2009/early 2010, Assénagon acquired €17 million of the Notes at a significant discount of 42 cents per Euro. In October 2010, the Issuer announced exchange offers for the Notes as part of the restructuring of its subordinated debt. The offer proposed was an exchange of the existing Notes for new unsubordinated notes at a price of 20 cents per Euro. In order to accept the offer, noteholders had to agree to vote in favour of a resolution at a noteholder meeting, amending the terms of the existing notes and granting the Issuer the right to redeem any Notes that were not exchanged at a value of one cent per €1,000 (the "Resolution").

Assénagon did not accept the offer and did not attend or vote at the meeting. However, as 92.03% of the noteholders did accept the offer, the Resolution was duly passed. Subsequent to the settlement date, which was one day after the noteholders meeting, the Issuer exercised its right to redeem the remaining Notes at one cent per €1,000 meaning that Assénagon received €170 for its €17 million.

Issues

Assénagon brought a claim for a declaration that the Resolution was invalid on three grounds, namely:

  1. The resolution was ultra vires to the powers granted to the majority under the Trust Deed.
  2. As the Issuer or any subsidiary was not entitled to vote at the meeting under the terms of the Trust Deed, all votes held beneficially, or for the account of the Issuer, should be disregarded.  
  3. The Resolution was an abuse of the power of the voting majority because it conferred no benefit on the noteholders as a class. As at the date of the meeting, the Resolution could only have affected the minority and was therefore oppressive and unfairly prejudicial to the minority.

Decision

The Court rejected the ultra vires argument on the basis of the wording of the Trust Deed but agreed with Assénagon in relation to points 2 and 3.

Briggs J held that the contracts for exchange of the Notes expressly committed the sellers to vote for the exchange of the Notes at the noteholders meeting, in a manner calculated to serve the Issuer's interests. As the Notes had been accepted for exchange by the Issuer in advance of the noteholders meeting, they were in fact held for the benefit of the Issuer at the time the noteholders meeting took place. Therefore those votes should be disregarded.

On the question of abuse of power, Briggs J found that the Resolution was no more than a negative inducement to deter noteholders from refusing the proffered exchange and it was the majority of the noteholders who wielded that power via the Resolution, albeit at the Issuer's request. The purpose of the Resolution was to impose upon a then defined minority the expropriation of their Notes in circumstances where the majority had by then the benefit of the contracts for the new notes of substantial value. This was both oppressive and unfairly prejudicial to the minority.

Comment

This decision has important implications for debt restructurings as the use of exit consents becomes more widespread. It may also open the door to claims from noteholders who have already seen the value of their securities destroyed via the use of an exit consent technique.