The English Courts limit the use of ‘exit consents’ in bank restructurings

Introduction

In Assenagon v Irish Bank the Chancery Division of the High Court provided the most important analysis of exit consents under English law. Exit consents area common technique used in bond restructurings where an issuer seeks to amend the terms of the existing bonds. Thus, an issuer will invite all bondholders to exchange their existing bonds for replacement bonds issued on different terms. Yet, the exchange takes place on condition that the bondholders commit themselves to vote in favour of a resolution to be proposed at the bondholder meeting and calling for a substantial (and detrimental) amendment to the outstanding (and not tendered) bonds. The resolution (itself known as the exit consent) does not affect bondholders who tender their bonds (who therefore enjoy the new bonds) but gravely affects bondholders who do not exchange their bonds in case the resolution is ultimately passed at the bondholder meeting. In fact, for these non-consenting bondholders their outstanding bonds will beeither significantly devalued or will be redeemed for nominal consideration. Exit consents are a powerful deterrent for bondholders which would seek to hold out from a restructuring even in non-opportunistic cases where they genuinely believe that the exchange proposal is less attractive than retaining theexisting bonds.

Facts

In late 2009 Assenagon acquired for a value of €17 million subordinated and floating rate notes issued by Anglo Irish Bank pursuant to a trust deed governed by English law. The notes were wholly unsecured and subordinated to all creditors but equity shareholders. Earlier that year, Anglo Irish Bank had been nationalised and the Irish government had been intending to restructure the bank’s debt on more favourable terms as part of a Liability Management Exerciseaimed at increasing the bank’s Core Tier 1 capital.

In October 2010, the Bank launched an exchange offer under which bondholders could tender their old notes for new notes at an exchange ratio of 0.20. Bondholders accepting the exchange offer were required to vote in favour of a resolution at the next bondholder meeting which would redeem all outstanding notes for the amount of €0.01 per €1,000 in principal amount (the exit consent).

The exchange offer was largely successful and at the bondholder meeting the resolution was passed. As a consequence, Assenagon- which had not accepted the exchange – received €170 for notes which had a face value of €17 million.

Assenagon challenged the exit consent on the basis that:

1. The exit consent was ultra vires – it extended beyond the powers conferred to the majority of bondholders by the terms of the trust deed insofar as it permitted the issuer to expropriate the old notes for a nominal amount.
2. The resolution had been procedurally flawed insofar as it permitted bondholders to vote at the bondholder meeting despite holding the notes beneficially for the issuer (contrary to the terms of the trust deed).
3. The exit consent was an abuse of power (specifically, an unfair and oppressive act) by the majority as it conferred no benefit on bondholders as a class.

The High Court judgment

Briggs J held that Assenagon was correct with regards to the second and third point and consequently held the exit consent to have been unlawful.

With regards to the ultra vires issue, Briggs J held that the complete abrogation of all rights of the bondholders was within the powers conferred to the majority by the trust deed.

With regards to the disenfranchisement issue (whether the bondholders who had tendered their notes could vote at the meeting in favour of the exit consent) Briggs J agreed with Assenagon’s contention that the vote was improper. Reference was made to the terms of the trust deed which prevented notes beneficially held by the bank from being taken into account for voting purposes. The assertion that the relevant date to assess the beneficial entitlement of the notes was not the date of the meeting but the exchange date was disregarded insofar as it contradicted the express terms of the trusts deed.

With regards to the alleged abuse of power exercised by the majority, Briggs J held that the resolution was both oppressive and unfair against the minority as it conferred no conceivable benefit or advantage upon the bondholders as a class and because the voting power was exercised solely to the detriment of the bondholders which had not exchanged their notes. In light of the well-established principle that the authority conferred upon the majority for decisions concerning the interests of the class as a whole must be exercised bona fide, the judge concluded that the approval of such a resolution which annihilated (rather than improved) all economic value in the notes was unlawful.

On the other hand, the judge recognised that the assessment of what was unfair and prejudicial was a contentious matter – if one considered the resolution on the day it was passed it was clearly prejudicial to the interests of the minority. Yet, if one considered the entirety of the bank’s proposal (and thus the exchange offer to which the exit consent was attached) the offer appeared less prejudicial. It seems that on different facts – if, for example, the bondholders who opposed the resolution could still be offered the chance to exchange the notes after the resolution had been passed – the resolution would not have been considered oppressive. On the present facts, Briggs J concluded that it could not be 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 nominal consideration. The judge also characterised an exit consent as a “coercive threatwhich the issuer invites the majority to levy against the minority… [whose] only function is the intimidation of a potential minority, based upon the fearof any individual member of the class that, by rejecting the exchange and votingagainst the resolution, he (or it) will be left out in the cold.”

Consequences and Implications

This judgment is likely to have a wide ramification for debt restructurings governed by English law in which exit consents are used. It is important to understand that the court was concerned with the very exercise of the power by the majority and not by an absence of transparency or disclosure by the bank when proposing the exchange offer. The case is currently subject to appeal, and in this regard the position adopted by the Delaware Courts in the United States may shape the ultimate resolution of the issue.¹