The legality of exit consents, used widely in the bond markets in the context of liability management exercises, has been examined for the first time under English law.  In Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Limited1, (Assénagon), the High Court upheld a challenge to the legality of an exit consent on the basis that it was oppressive towards the minority bondholders.  The court reiterated the principle that majority power must be exercised bona fide in the best interests of all bondholders and not in a manner which is oppressive or otherwise unfair to the minority.

In a separate case, Sergio Barreiros Azevedo v Imcopa Importacao, Exportaacao e Industria de Oleos Limitada2 (Azevado), the High Court considered the use of consent payments, also commonly used in liability management exercises, and found them to be lawful and not in the nature of a bribe.

Key issues

  • Exit consent clauses which are construed as oppressing the minority due to unduly oppressive or punitive terms imposed on non-consenting noteholders will not be enforceable.
  • Powers to modify note provisions need to be drafted broadly enough so as to anticipate all possible types of modifications which may be needed on exit consents.
  • Care must be taken in relation to the timetable for an exchange offer utilising an exit consent solicitation, to ensure that at the date of any noteholders' meeting, the notes being voted are in fact beneficially owned by the noteholders and not the issuer.
  • Consent payments which are openly disclosed and offered to all noteholders entitled to vote on an equal basis are lawful and do not constitute bribes.
  • We have no doubt that exit consents, when properly structured, will be enforceable under English law.


The facts

The claimant, Assénagon Asset Management S.A., purchased subordinated floating rate notes due 2017 (the Notes) issued by the then Anglo Irish Bank Corporation Limited (now the Irish Bank Resolution Corporation Limited) (Anglo Irish). The Notes were purchased between September 2009 and April 2010, by which time Anglo Irish was already the subject of a staged rescue by the Irish Government, as a consequence of severe liquidity problems.  

In September 2010, the Irish Minister of Finance made a statement on restructuring of the Irish banking system which, while stating an intention to respect all senior debt obligations of Anglo Irish, also announced that the expectation of the Irish authorities was that the subordinated debt holders of Anglo Irish would have to make a "significant contribution towards meeting the costs of Anglo [Irish]". The Irish Government announcement contemplated a two stage approach which anticipated legislation in relation to Anglo Irish if voluntary arrangements did not proceed. Given the stated intention of the Irish Government, it is likely that holders of subordinated obligations of Anglo Irish would have received little payment for the Notes under any such legislative arrangements. The exchange proposal for the Notes formed part of the restructuring.  

On 21 October 2010, Anglo Irish announced exchange offers in respect of certain series of its notes including the Notes. Noteholders were offered an exchange of Notes for new notes (the New Notes) at an exchange ratio of 0.20, i.e. an offer of a holding of 20 cents of New Notes for every one euro of Notes. The New Notes were not subordinated and were to be guaranteed by the Irish Government.  

In conjunction with the exchange offer, Anglo Irish also announced that it would convene a meeting of noteholders to approve amendments to the Notes in November 2010, including giving Anglo Irish the right to redeem the Notes at a rate of €0.01 per €1000 principal amount of Notes at any time (the Resolution). Redemption on this basis gave a payment ratio of 0.00001 (in contrast to the exchange ratio of 0.20) reflecting the amounts (if any) which would be payable to noteholders if the Irish Government were to allow Anglo Irish to be wound up. Any noteholders wishing to exchange their Notes were, by virtue of tendering their Notes for exchange, deemed to have given approval for a vote in favour of the Resolution. The meeting of noteholders convened to pass the Resolution was timetabled for the day after the announcement by Anglo Irish of its acceptance of exchange requests of noteholders.  

An overwhelming majority of the noteholders (92.03 per cent.) offered their notes for exchange and thereby bound themselves to vote in favour of the Resolution. As a result, the Resolution was passed and the Notes were redeemed shortly after the meeting. The claimant did not tender its Notes for exchange or attend or vote by proxy at the noteholders' meeting. It received just €170 for its €17 million face value of Notes.  

In April 2011, Assénagon sought a declaration that the November 2010 resolution was invalid from the Chancery Division of the English High Court. The court’s judgment was delivered by Mr Justice Briggs on 27 July 2012.  

Set out below are some of the key findings and their implications.  

Ultra vires

The claimants argued that the trust deed relating to the notes did not confer power on Anglo Irish to abrogate the rights of the noteholders in the manner contemplated by the Resolution. However, the judge was of the view that taking the provisions of the trust deed as a whole, the noteholders must be taken to have assented to the exercise of a power of the majority to bind the minority, including as to a forfeiture of the rights conferred by the notes. The trust deed inter alia envisaged specific quorum requirements for an extraordinary resolution relating to a reduction or cancellation of the principal payable on the Notes or the minimum interest payable thereon.  


Whilst not a new consideration, this case serves as a timely reminder, especially in the context of the current Eurozone crisis, that powers to modify notes need to be drafted broadly enough so as to anticipate clearly all possible types of modification which may be required on an exit consent and grant sufficient power to the majority to bind the minority.  

Voting on behalf of Anglo Irish

The terms of the trust deed provided that neither the issuer, nor any subsidiary, would be entitled to vote at any meeting in respect of notes beneficially held by it or for its account. This is a standard provision which is intended to protect noteholders from votes being cast by the issuer in its own interest where notes are owned, or beneficially owned, by it. The claimant raised the technical (but correct) argument that at the time of the noteholders' meeting, the Notes which had been tendered for exchange under the exchange offer were in fact beneficially owned by Anglo Irish and therefore carried no entitlement to vote.  

The court agreed with the claimant, on the basis that the bondholder meeting in November 2010 was held after the results of the exchange offer had been announced but before settlement, at which time Anglo Irish had a beneficial interest in the notes held by the relevant majority. The court explained that the Notes which had been accepted for exchange by Anglo Irish were held under specifically enforceable contracts for sale between it and the relevant tendering noteholders, and as such must be viewed as conferring a beneficial interest in the Notes on Anglo Irish from the moment it accepted them in the tender offer.  


The most relevant aspect of this technical finding for future liability management exercises is that the timetable for the Anglo Irish exchange offer and consent solicitation led to this somewhat surprising result. Had the process been structured such that the noteholders resolution had taken place prior to the acceptance of the exchange offer, then the result would have been different.  

Abuse of the minority

Notwithstanding the finding in relation to the beneficial ownership of the Notes being sufficient to decide the case in the claimant's favour, the judge also went on to consider the claim that the Resolution constituted an abuse of the power of the majority, not least because this raises, in his words, a "question of wide importance in the bond market".  

The claimant had argued that the only effect of the Resolution was to deprive the non-exchanging noteholders of any value in their notes whereas the exchanging noteholders received substantial value in the exchange. The Resolution therefore could not be described as being bona fide and of any benefit to the noteholders. Conversely, Anglo Irish argued that the transaction should be viewed in its entirety, including the benefits or inducements which were to be gained in the prior, but related, exchange offer. However, this was not accepted. The noteholder resolution was viewed alone, and on its own merits, as no more than a negative inducement to deter noteholders from refusing the exchange offer. The judgment stated that "the exit consent is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or nothing less. Its 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 judge concluded that this form of coercion was entirely at variance with the purpose for which majorities in a class are given the power to bind minorities.  


The judgment is perhaps somewhat surprising, given the context of the offer. It seems that the judge was strongly influenced by the wide disparity between the outcomes for the exchanging and non-exchanging noteholders (whose Notes were described as being "expropriated" and "destroyed") notwithstanding the economic context in which the offer was being made. The judge left open the question of whether the analysis applied in this case would be applied to other instances of use of exit consents which are less starkly detrimental to the interests of the minority. However, some of the comments made, such as those cited above are, whether considered reasonable or not, quite critical of exit consents generally. Pending appeal therefore, it remains an open issue as to whether this case will be followed in other less obviously coercive examples of the use of exit consents. The practical issue which market participants need to deal with on a regular basis is creating adequate incentives to motivate noteholders to exercise their powers. In this instance, the Court found that the "negative" incentive was too detrimental to the minority noteholders.  


The facts

In Azevedo, Imcopa, the issuer of fixed rate guaranteed notes (the Notes) defended claims, inter alia, that it was unlawful to offer to pay benefits to one or some only of the noteholders of a class of noteholders, and that consent payments are in the nature of a bribe and are a fraud on those noteholders from whom equivalent payments were withheld.  

The issuer had proposed three successive resolutions postponing the payment of semi-annual interest payments on the Notes in the context of a restructuring which had been proposed to all noteholders and approved. In each case, a consent payment was offered to all those voting in favour of the postponement and was disclosed to all noteholders.

The claimant noteholder voted for the first two postponements and received the applicable consent payment, but did not vote for the third postponement. The third postponement was approved by the noteholders.  

The court's judgment was delivered by Mr Justice Hamblen on 30 May 2012. The judge gave summary judgment to Imcopa, concluding that the claims had no real prospect of success. The key finding for our purposes relates to consent payments.  

Consent payments

The claim of bribery was rejected by the judge, following the authorities3, on the basis that the consent payments were openly offered equally to all noteholders alike, were repeatedly disclosed and explained in documents made available to them before the relevant noteholder meetings, and all noteholders were free to vote as they saw fit. The judge also took comfort from a Delaware law precedent4 and US academic sources to conclude that "there is nothing fraudulent or illegal about open consent payments offered alike to all noteholders, that they were not a bribe and the vote was not invalidated thereby".


The decision in this case not only directly addresses the question of fraud and bribery but also confirms the question of the lawfulness of consent payments per se. The only note of caution to sound is that the judge in the Anglo Irish case distinguished Azevedo, inter alia, on the basis that the resolutions put to the noteholders were beneficial to the noteholders, whereas in Anglo Irish the resolution contained no benefit for the noteholders whatsoever. As a consequence, a consent payment allied with an exit consent solicitation which contained no benefit to the noteholders would be at risk of not being upheld.  


Going forward, with sensible structuring of a liability management exercise, it should be quite straightforward to avoid the pitfalls outlined in Anglo Irish, for example by use of a so-called "drag along" offer which is referred to in the judge's obiter comments in the case. In this scenario, it was conceded by the claimants that, on analogous facts, if the same Resolution had been coupled with a subsequent potentially beneficial exchange offer to all noteholders alike, which was available for acceptance after passing of the resolution, then there could not be any inherent oppression of or discrimination against the minority.  

By analogy, it would seem that structures which ensure that non-consenting bondholders get substantially equivalent value to exchanging bondholders (excluding up-front consent payments) should not be viewed as abusive in the same way as in this case. Consent payments, which have now been affirmed as valid in Azevado, could be used in conjunction with such an exit consent to incentivise noteholders to approve the relevant restructuring resolution.  

As a purely hypothetical example, we would be surprised if any of the oppression issues raised by Assénagon would have succeeded if the exit consent was structured to amend the conditions to allow Anglo Irish to call all remaining Notes for exchange for New Notes at, say, 15 cents, with those offering their notes for exchange (being accepted after the meeting!) receiving an exchange at 20 cents.