The effectiveness of the restructuring technique known as “exit consent” has been cast into doubt by the English High Court. During a recent consent solicitation, Assenagon Asset Management SA, a noteholder with a €17m holding in Anglo-Irish Bank (now IBRC) refused to vote in favour of an exchange offer that would have emanated in their holding being replaced with paper that was an eye watering 20% discount of their bonds face value. Assenagon’s reward for protecting their position was a €170 payout for their entire holding (0.00001% of face value). Unsurprisingly, litigation ensued and Assenagon were successful in obtaining a declaration that the exchange resolution was not valid.

Assenagon challenged the validity of the resolution on three fronts, the first two arguments were based on the construction of the Trust Deed whereas the third argument is significant to the market due to its general application:

Argument 1: The resolution was ultra vires the power of the majority under the Trust Deed. The Judge disagreed with the Assenagon’s argument as to how the Trust deed should operate and so this argument failed.

Argument 2: At the time of the noteholders’ meeting the votes in favour of the resolution were held beneficially by or for the account of Assenagon and the Trust Deed provided that such votes should be discounted. The judge, Mr Justice Briggs, found for Assenagon on this point because the contracts for exchange of the existing notes had become enforceable before the meeting had taken place, thereby giving the bank the benefit of those votes. He concluded that this brought the prohibition in the Trust Deed into play. But, the judge acknowledged that this decision was finely balanced, with good arguments on both sides.

Argument 3: The resolution was an abuse of the power of the majority because (i) it did not benefit all noteholders as a class; and (ii) by the time of the vote it could only affect a minority and was therefore oppressive and unfair as against that minority. Assenagon won on this important argument, which makes the case have wider significance for the restructuring market. The judge said that the key question was whether it could be lawful for the majority to lend its aid to the coercion of the minority by voting for a resolution which expropriates that minority’s rights under the notes for nominal consideration. The judge determined that the answer had to be no: the exit consent was simply a coercive threat which the issuer had invited the majority to levy against the minority. Its only function was intimidation. He said in summary: “…oppression of a minority is of the essence of exit consents of this kind, and it precisely that at which the principle restraining the abusive exercise of powers to bind minorities are aimed”.

IBRC have launched an appeal against the High Court’s ruling which is expected to be heard by the Court of Appeal in Spring 2013. It will be interesting to see whether the Court of Appeal, if it agrees with the judge on the abuse of power, will provide more practical guidance than appears in the High Court judgment. For example, some incentive is usually necessary to persuade the majority to vote in favour of a discounted exchange offer – would the outcome differ if the facts were not so extreme as in this case and the minority simply revived a worse deal but one that could not be classed as expropriation? Where should the line between commercial practicality and the risk of oppression be drawn? Either way, one thing that is for sure, given its wider implications, market participants in the debt capital markets space can ill afford to take their eyes off this case.