In Citibank NA v Oceanwood Opportunities Master Fund(1) the High Court confirmed the validity of a senior noteholder's directions under a note structure governed by the laws of multiple jurisdictions. In doing so, it highlighted the common ground between the London and New York markets with regard to the common law principles of contractual construction and demonstrated the efficiency of the speedy trial procedure in the Financial List.
Citibank NA was security agent and note trustee under certain financing arrangements for the Norwegian Norske Skog group. Citibank sought directions under the Part 8 procedure as to whether it should – or was entitled to – follow directions given by the first defendant (Oceanwood), which was the majority holder of senior secured notes. The loan documentation contained provisions which allowed majority noteholders to give directions to Citibank, but also contained a provision which disentitled a noteholder which "control[led]" the debtor from having its vote counted. The question was whether Oceanwood was disqualified on the basis that it controlled the issuer of the notes. In circumstances where the minority noteholders (collectively, Foxhill) had also raised the question, Citibank felt that it was necessary to obtain a determination from the court.
The Norske Skog group was a Norway-based international manufacturing business. The parent company of the group was Norske Skogindustrier ASA which was, until shortly before the hearing of the matter, listed on the Oslo stock exchange. There were several companies in the group, referred to by the court as the 'Norske group'. The group's secured debts totalled around €900 million, the relevant part of which for these proceedings were notes issued through and governed by two principal transaction documents: an indenture and an inter-creditor agreement. The issuer was Norske Skog AS (NSAS). The shares in NSAS were secured by way of a share pledge, which formed part of the note security package.
Restructuring negotiations were launched by the top companies in the group in June 2017 following a missed interest payment by the group. By the time of the litigation, Oceanwood had acquired further senior notes, thereby creating a holding of senior notes for itself of over 51%.
On August 24 2017 the majority of the senior secured noteholders (64.65%, including Oceanwood) directed Citibank to accelerate the notes, which it did on September 12 2017. On the same day, the same noteholders directed Citibank, as security agent, to use the voting and other powers conferred by the share pledge to convene an extraordinary general meeting of NSAS to pass resolutions to replace the board of that company.
On September 1 2017 a €15.93 million liquidity facility was granted to NSAS by Oceanwood, among others. Under the terms of the indenture, this facility ranked with the senior notes in terms of priority and voting rights.
On December 13 2017 NSAS issued a press release announcing the start of a public sales process, in which Oceanwood submitted a bid. Citibank proposed to take the necessary enforcement action to pursue and complete the sale, but for this purpose it required directions from the majority of the senior noteholders.
Transaction documents The indenture governed the issue of relevant notes. The most significant provision was Section 2.09, which related to 'control':
"Section 2.09 Treasury Notes
In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer or any Guarantor, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any Guarantor, will be considered as though not outstanding, except that for the purposes of determining whether the Trustee will be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned will be so disregarded."
The practical significance of this section lay in its interaction with the inter-creditor agreement, and the fact that there had been a default (and subsequent enforcement of security).
As security agent, Citibank formally exercised all enforcement powers for the noteholders, but it did so potentially subject to direction from a majority (an instructing group), pursuant to Clause 11.2. An 'instructing group' was defined as those senior noteholders that held more than 50% of the secured participations at the relevant time. In effect and for these purposes, the instructing group was the majority of the senior noteholders.
Clause 8 of the share pledge contained provisions which entitled Citibank to vote the shares which had been invoked.
The indenture was governed by New York law and contained a New York court jurisdiction clause. The inter-creditor agreement contained the main direction-giving provisions and was governed by English law with an English jurisdiction clause.
Foxhill was concerned that Oceanwood was taking unfair advantage of its position to procure a sale process in which (Foxhill argued) it could then participate in an unfairly advantageous manner. However, the question in these proceedings turned on whether Oceanwood's wishes or directions could or should be taken into account by Citibank. The questions for the court were:
- whether any instruction given by Oceanwood was an instruction by an instructing group for the purposes of the inter-creditor agreement;
- whether any interest of Oceanwood was to be disregarded pursuant to Section 2.09 of the indenture on the basis of its 51% holding; and
- whether any interest of Oceanwood was to be disregarded pursuant to Section 2.09 of the indenture on the basis of de facto control.
Principles of construction The court held that the central question underlying all three issues turned in part on the construction of Section 2.09 of the indenture. The court dissected the section as follows:
"In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by… any Person directly or indirectly controlling … the Issuer or any Guarantor, will be considered as though not outstanding."
The court considered that the question of construction was what was meant by – or what acts constituted – 'controlling'. This question had to be decided under New York law (by which the indenture was governed). The court noted that there was little dispute between the New York law experts as to the principles of New York law and that most of the principles were entirely familiar to common law lawyers in England, which was "not surprising". The court referred to Excalibur Ventures v Texas Keystone(2) in this regard, and considered most of the relevant principles uncontroversial. The following principles of construction applied:
"(i) Where a contract is unambiguous, its meaning should be found within the four corners of the contract, giving practical interpretation to the language employed and the parties' reasonable expectations.
(ii) In interpreting a contract, the court should arrive at a construction which gives a fair meaning to all the language employed by the parties to reach a practical interpretation in order to realise the reasonable expectations of the parties. This is not necessarily a literal interpretation. The expectations of businessmen should be considered in relation to business contracts.
(iii) The factual context of the contract is capable [of being] relevant to interpretation.
(iv) A contract should not be construed to produce a commercially unreasonable result, at least if an interpretation is available which will prevent that.
(v) Headings to clauses can in principle be used as a guide to construction, but not if the contract forbids it.
(vi) Where the words of a contract mirror the words of a statute, determinations as to the statutory effect may be a guide to construction, but they are not necessarily determinative.
(vii) The court should avoid (if possible) a construction which gives rise to an inconsistency with another part of the contract."
Clause 2.09 – control Foxhill had argued that Citibank could vote the NSAS shares under the share pledge, and that Citibank had to act on the instructions of the majority of the senior noteholders. Given that Oceanwood had that majority, it could direct Citibank. Therefore, according to Foxhill's argument, Oceanwood controlled NSAS.
The court held that a majority provision direction was built into the indenture, irrespective of the similar provisions of the inter-creditor agreement. Further, the indenture expressly referred to the inter-creditor agreement in a number of places apart from Clause 6.05, so the latter's majority direction provisions (in Clause 11) were also firmly in the contemplation of the parties. The court held that the inter-creditor agreement was clearly part of the commercial context of the indenture (and vice versa) and must be read and given effect to alongside it.
When the court considered all of the relevant provisions as "part of the same package", it was clear that they provided for securities to be given and then managed. It provided for a majority of noteholders to prescribe matters relating to security enforcement, on the obvious assumption that the interests of the majority creditors should be acknowledged and served. It provided for one method of enforcement to be the voting of the shares (under the share pledge). Accordingly, the majority was able to determine how the shares should be voted. The greater the share of any given noteholder, the greater its commercial interest.
The court held that it would make no commercial sense – and would be "absurd" – for Oceanwood, which held the greatest security interest, to be instantly disqualified from enforcing the security. If Foxhill was concerned about an "abuse of power", the remedy for that should lie elsewhere.
Ultimately, the court held that the 'control' referred to in Section 2.09 did not include the consequences of working out the arrangements in the loan documentation and which arose under the documentation itself. This was not really control – instead, it was a provision as to how Citibank should realise a security; in this context and for that purpose (if voting became relevant), as to how to vote the shares. The 'control' referred to in Clause 2.09 must be control arising other than under the loan documentation.
It followed that while Oceanwood's instruction was provided by an instructing group, Oceanwood's direction for the purposes of Section 2.09 of the indenture was not to be disregarded.
De facto control The court was not persuaded that Oceanwood had de facto control of NSAS. It held that all of Oceanwood's alleged actions were taken in its interest as a creditor (and, for a time, with other creditors) and to further its interests as a creditor. The court considered that Oceanwood's conduct amounted to a negotiation, rather than control. The court did not consider that any of Oceanwood's acts were sufficiently "pervasive" to give it a relevant degree of control over NSAS. The ability to veto certain things might be said to have given a limited degree of control of the things to which the veto related, but even taken together there was no pervasive influence which could amount to control for the purposes of Section 2.09. The court had seen no evidence that such a degree of influence existed.
This decision provides another welcome reminder that the court will take a proactive and commercial approach to contractual construction questions, particularly given that this matter was decided in just over three months under the speedy trial procedure in the Financial List. Market participants should also take comfort from the fact that the common law principles of construction appear to be similar across the two major markets for debt securities.
For further information on this topic please contact Andy McGregor or Matthew Evans at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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