Wrongful Class Rights Variation in a Register Ltd UK Company and the Case Study of Assenagon Asset Management v Irish Bank Resolution

04 Jan

At the time of register a business in UK the owner have capital in the form of share capital that is distributed among the shareholders or members and also the shares are divided into classes. It varies with the type of business and capital. The classes may be given rights that are specific to them. After register a business in UK, class rights can be subjected to alteration but the intention should be the consideration of best interests of the relevant class. For better elaboration of the variation of class rights, consider the case study of British American Nickel, a register Ltd UK corporation. After forming a limited company UK there also comes another factor regarding class rights, which is the wrongful variation that affects the class right. In this article, we are going to discuss wrongful class rights with the elaboration of the case study of Assenagon Asset Management v Irish Bank Resolution. Some important points are inferred, at the end to provide proper understanding about the wrongful class right variation after forming a limited company UK either through online company formation UK or through visiting.

Case Study: Assenagon Asset Management v Irish Bank Resolution

The case had concern with voting rights of creditors. A bank had issued bonds that were held by the claimant. These bonds would be subordinate to secured as well as unsecured creditors’ claims whenever the circumstances led to insolvency and would be ahead of shareholders of equity only. There was a financial crisis all over the globe. The bank had to liquidate. As a consequence, the government of Ireland tried to rescue the bank. It was ordered by the government to the subordinate holders of debts, to contribute a significant figure to help the bank meet its losses. Later, a strategy was adopted by the bank, “exit consent”, regarding some series the notes of that bank which also include the notes of 2017. A suggestion was given that in exchange of each 1 euro of notes of 2017, a new notes’ 20 cent holding should be given. Hence, the ratio of exchange would be 0.20. Additionally, it was also suggested that the holders of notes would have to vote for an extraordinary resolution proposing the variation of conditions of former notes of 2017, so that the bank would be able for redemption of any outstanding 2017.  The payment ratio would be 0.00001 that is, a rate of notes of 0.01 Euro per 1000 Euro. The offer of exchange and the proposed resolution made 92.03% of persons holding notes to exchange their notes and bind themselves for voting in support of the resolution. Hence, after passing of the resolution in a duly manner, the bank utilised its authority of redemption at a ratio of payment of 0.00001. The claimant was given 170 Euro in return of its 17 million euro face worth of notes of 2017. The authenticity of the exit consent strategy was challenged by the claimant. The ground for challenge was that the holders of majority notes tried to use their authority wrongfully to impose a binding on the minority noteholders, although, the issuer invited them. The claim was given permission by the Court.

Briggs J held:

  • It is for the first time, that the claim investigates the lawfulness of a strategy, named exit consent, exercised by those who issued corporate bonds, in the views of law of England. The aim of the issuers is to convince a particular group of bond holders to give their bonds in exchange some other bonds available for substitution on different conditions.
  • The holders are called to give away their bonds with a binding that they have to vote in favour of a resolution which is irrevocable and suggests the destruction of previous rights of the old bonds, by subjecting them to amendments. Hence, acquiring the name “exit bond”.
  • There are no bad effects of this strategy on the persons who hold bonds, and want to exchange them as well as vote in support of the resolution. The ground for this is that either the one who has issued those bond has been unsuccessful in gathering a major number of bondholders in favour of the resolution, because in that case there would neither be the passing of the resolution nor the exchange of bonds. Or the ground may be that upon the acquisition of a required majority, his bonds could be given in exchange of new bonds and get revoked by the issuer.
  • If any bondholder refuses to exchange his bonds or vote in support of the resolution, then he may place himself into a risky situation because after the passing of the resolution his bonds would be depreciated in worth by the resolution or will be subjected to destruction after redemption for a nominal worth. The basis for this is that the effectiveness of the exchange scheme is dependent on the due date of exchange which is before the bondholders’ meeting’s arrangement. After the passing of the resolution the holder who disagrees with it, will not be entertained by an opportunity to withdraw from the offer before it is implemented, so that he may make an exchange of his bonds on the conditions that are presented to him and approved by the majority of bondholders.
  • It is quite clear that such an offer of exit consent is given to oblige the bondholders to assent to the exchange and show no opposition towards it, even when the bondholders believe that the new bonds being offered to them are not as attractive as their old bonds.
  • The purpose for need of such a restriction is the risk of any person holding bonds that the majority of the bondholders that is ample, would indulge in the voting process and give their consent for the resolution. This restriction has been described in different books as an imposition upon the bondholders as well as, encouragement, induction to approve the exchange.
  • The dependency of the strategy’s persuasiveness is the hard time that the bondholders may have to encounter in arranging themselves in the given deadline given by the issuer in a manner that helps them determine before the due date that whether there exists a majority of more than 25% that is eager to vote against the resolution and stop it from proceeding.
  •  My conclusion is that Mr. Snowden has raised the right question. The question raised is that can the majority’s lending its help to forcefully gain compliance of the minority for a resolution that harms the rights of the minority given via their bonds for a nominal worth, be lawful?
  • I believe, the answer is “No”. the grounds for my negative answer arise from what I have understood about the offer and mentioned at the beginning. The reason is not that the issuer intends to gain the securities of the bondholders in a positive manner via expropriation rather than by arranging a contract of exchange for a value to attract the agreement of the bondholders.
  • In fact, contrarily, as many bondholders give their consent, as happy the issuer would be. Moreover, the exit consent is not the procedure by which the bonds’ issuer tries to acquire the reconstruction made by substituting the current securities with new. Rather it is simply  a threatening coercion which is given as an invitation to persons holding majority of the bonds to have an imposition on the minority. The only purpose of the offer of exchange is to intimidate the minority because it is feared by any person of that class, that if the minority votes in contradiction to the resolution and rejects the exchange offer, then that person will be left alone in a difficult situation.
  • This method of coercing disagrees with the reasons for which the majority is authorised to impose a binding on the minority and the argument that only the issuer is responsible for inviting them or making this happen.
  • The truth is that at the time of when any single person of any class is allowed to decide, no definite number of minority is known against whom the exit consent is designed. But it will also happen that there will exist a definite number of minority at the time when the exit consent is imposed via voting and its sole aim is to prey on the basis of a perception of every person having membership of that class that he will be expropriated along with the rest of the minority if he decides to go against the resolution and exchange offer if the offer proceeds ahead.

Inferences from the Case Study

Briggs J distinguished between the facts of this case from the case of Azevedo v Imcopa. He stated:

  • In the case of Azevedo, the issuer who was the defendant of notes with clauses for changing via a majority quite same as in this issue made a proposition of 3 successive resolutions, deferring the payment of semi-yearly interest pays. And in every case, an offer of fully disclosed financial inducements that were named as consent payments, for all the supporting voters. The payment was postponed to give facility to reconstruction of the issuer for advantaging all of the stakeholders. The claimant had given his votes in support of the first two postponements, and was given the inducements. However, he did not support the third one, which was even then approved by majority that was required. The court of Brazil gave approval for the reconstruction.
  • According to Hamblen J, the manner in which the offer was made openly, did not characterise it as bribery or fraudulent. Hence, he rejected the claim made by the claimant. He also got assurance from the courts of Delaware giving approval to offerings similar to consent payments. Also, he assured it from the academic comment that this kind of payment had been commonly adopted in United States, for refinancing of debts.
  • I accept that the consent payments in the case of Azevedo and the exit consent in current case seem similar at first sight. Possibly, the deal of New Notes, can be characterised as monetary inducements to give vote in support of the resolution. However, this characterisation seems to me faulty. The truth is entirely opposite. The purpose for using the resolution is to make use of it as a negative inducement, to prevent the holders of Note in the current case, to reject the offered exchange.
  • The dissimilarities in both the two cases are quite more in number than their similar points. Firstly, the resolutions of postponement of interest payments were in the case, Azevedo, were according to will of the issuer and the majority noteholders in the event. However, in this case, the matter of the scheme of the Bank was the replacement of current notes with new ones through a contract of exchange. And in this case, the resolution was a negative inducement to refrain the holders of notes from rejecting the exchange offer. And secondly, the inducement in Azevedo was given by the issuer, but in the present case, it was offered by majority noteholders, although at the request of the issuer, which manages the negative persuasion made by the resolution. The third difference is that, the proposition in Azevedo was advantageous to all the stakeholders, whereas in the current case, the resolution was designed as such that it destroyed the worth of Notes and did not benefit the Noteholders. The fourth point is that in Azevedo, there was no unfairness but a mere matter of bribery. But, in this case the accusation is about oppression and not bribery.
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