Whether it is legitimate 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?
This case concerns the legitimacy of an exit consent technique utilised by IBRC in an attempt to incentivise burden sharing between IBRC and subordinated bondholders. The objective of the exit consent was to reduce the costs to the Irish taxpayer resultant from the nationalisation of Anglo Irish Bank.
An exit consent is a technique that allows a majority group of bondholders to change the terms of corporate bonds significantly, so as to entice the group of bondholders to accept an offer from the issuer to exchange the bonds for bonds of a lesser value and/or subject to less advantageous terms.
The bonds in question were subordinated floating rate notes due in 2017, issued by Anglo Irish Bank on 15 June 2007. They were wholly unsecured and were to be prioritised for payment upon insolvency ahead only of equity shareholders.
The trust deed set out the powers capable of being exercised by a majority of noteholders by an extraordinary resolution. These included sanctioning any compromise or arrangement between the issuer and the noteholder or sanctioning any modification of rights of the noteholders. The trust deed prohibited the issuer or any subsidiary from voting at any meeting of note holders in respect of notes beneficially held by it or for its account.
By 30 September 2010, Anglo Irish Bank had been nationalised. The Irish Minister for Finance announced his intention to initiate a process that would lead to appropriate burden sharing by holders of subordinated debt. This would involve a two stage process. The first stage would involve a voluntary restructuring of subordinated debt. The second stage, to be adopted if necessary, entailed legislation compatible with English law being adopted to ensure that restructuring.
The issuer proposed to exchange the old notes for new notes at an exchange ratio of 0.20 (close to the value at which the old notes were trading at the time); the new notes would not be subordinated. Any noteholder who offered to exchange their old notes for the new notes was obliged as a condition of the exchange to appoint a proxy to vote in favour of a resolution put to the note holders at a subsequent meeting. The resolution would give the issuer a right to redeem the old notes of those who did not exchange for a payment ration of 0.00001. The deadline for offering up the old notes in exchange for the new notes was set as the day before the noteholders meeting, where the resolution would be put to the noteholders.
The combined effect of the offer of the new notes, the risks associated with rejecting it combined with the practical difficulties faced by noteholders seeking to come up with a collective response were sufficient factors to ensure that 92.03% of the noteholders by value offered their notes for exchange. The claimant did not offer their notes for exchange.
The Claimant's Case
The claimant claimed that:
1) The resolution was beyond the power of the majority under the trust deed, because it conferred a power on the issuer to expropriate the old notes for no more than a nominal amount.
2) Contrary to the terms of the trust deed, at the time of the noteholders' meeting all those noteholders who voted in support held their notes beneficially for the issuer. Such votes ought to be disregarded.
3) The resolution constituted an abuse of power, conferring no conceivable benefit or advantage upon the noteholders as a class. By the time of the noteholders' meeting, it only affected the notes of the minority which had not exchanged their old notes for new notes; it was thus oppressive and unfair against the minority.
In addressing the claimant's arguments, Briggs J referred to a general principle of English law that applies to all authority conferred on the majority of a class when binding a minority, namely that this authority must be exercised bona fide and in the best interests of the class as a whole. Previously, as cited by Briggs J, it was held in Redwood Masterfund Ltd v TD Bank Europe Ltd (in the context of a syndicated loan facility) that this principle could only be implied for business efficacy purposes, if there was an obvious inference that it was intended to be inferred or if it was necessary to give effect to reasonable expectations of the parties. Briggs J disapproved of this statement on the basis that it is a term generally implied by the law of contract in arrangements of particular types, on that basis it can still be overturned by evidence of contrary intention, thus the extent and content of the principle that the majority must act bona fide and in the best interests of the class is inevitably dependent on the context in which the principle operates. This restatement of the principle is significant in many cases outside the context of the exit consent issue under consideration.
Regarding the claimant's first claim, the court held that the power of the majority to pass the resolution depended entirely on it falling within the power contained in the trust deed to sanction any abrogation in respect of the rights of the noteholders against the issuer.
However, Briggs J held that the vires of the action was rescued by the fact that the trust deed imposed a special quorum for the reduction or cancellation of the principal payable on the notes or the minimum rate of interest payable thereon. Briggs therefore concluded, assessing the trust instrument as a whole, that the noteholders must be taken to have assented to the exercise of a power by the majority to bind the minority by abrogating all rights of noteholders as against the issuer. The court found in favour of the defendant on this point.
Disentitlement of the Issuer to vote
Regarding the claimant's second claim, the purpose of the disentitlement of the issuer to vote contained in the trust deed was to prevent a vote designed to serve the interests of the noteholders from being undermined by the exercise of votes cast in the interests of the issuer.
Briggs J held that this applied to any person holding the notes for the benefit or for the account of the issuer. At this time, the notes were held for the benefit of the issuer. The applicability of the disentitlement was to be tested at the date of the meeting and not when the old notes were exchanged for new ones.
Briggs J went on to conclude that the issuer's interest in the shares at the time of the vote was a beneficial interest which ordinarily arises in favour of the contracting purchaser of shares and was an interest of the type contemplated by the prohibition.
The court found in favour of the claimant on this point.
Abuse of Power by Majority
Regarding the claimant's third claim, the court's findings have the potential to affect exit consents and the restructuring of bonds in a very significant way. Briggs J held that the coercive power of the exit consent is one which can only be wielded by the majority of the very class which the issuer wishes to coerce and not by the issuer itself which lacks any power to bring about an expropriatory amendment of the terms of the security.
The question was whether the passing of the resolution was an abuse of power by the majority noteholders, i.e. was it capable of being regarded as beneficial to the class of noteholders.
Briggs J held that the resolution was used as a negative inducement to deter noteholders from refusing the exchange. He went on to say that there was not a single noteholder who can be said to have accepted it unaffected by the coercive effect of the exit consent.
While in some cases the resolutions are the substance of what the issuer wishes to achieve, the issuer's primary plan was to substitute the old notes for new notes.
The purpose of the resolution was to destroy rather than enhance the value of the notes. The court drew a distinction between this situation and that occurring pursuant to a corporate restructuring where a compromise might conceivably increase the value of notes held by creditors by protecting the company from liquidation.
In short, Briggs J concluded, finding in favour of the claimant on this point, that it was not 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 notes for a nominal consideration.