Assénagon Asset Management S.A. v Irish Bank Resolution Corporation Limited

The court considered the legality under English law of an "exit consent" technique used in an exchange offer for subordinated notes. It addressed (i) the proper construction of the powers conferred on a noteholder majority by paragraph 18 and the special quorum in paragraph 5(b) of Schedule 3 to the Trust Deed; (ii) the scope and timing of the disenfranchisement in paragraph 13 of Schedule 3; and (iii) whether the majority's adoption of the exit consent was an abuse of power.

The judge held that paragraph 5(b) authorised a vote capable in substance of cancelling or reducing principal or interest, so that the power in paragraph 18 was not to be narrowly construed as necessarily excluding expropriation in all circumstances. However, the claimant succeeded on two independent grounds: (a) votes cast in favour of the resolution by holders whose offers to exchange had been accepted were disenfranchised under paragraph 13 because the exchange contracts were specifically enforceable and thereby conferred a beneficial interest in the Notes on the Bank; and (b) even assuming the prohibition did not apply, the majority's support for a resolution that operated as a coercive expropriation of a dissenting minority amounted to an abuse of the majority power to bind the minority.

Background and parties: The Bank (then Anglo Irish Bank Corporation Limited) offered an exchange of subordinated floating rate notes due 2017 for new, government-guaranteed notes. The exchange was accompanied by an "exit consent" Extraordinary Resolution enabling the Bank to redeem any remaining Existing Notes at €0.01 per €1,000 if the Resolution passed. The claimant, a purchaser of 2017 Notes after the 2008 rescue measures, held approximately €17 million face value and did not accept the exchange; after the Resolution passed the claimant's Notes were redeemed for €170. The claimant brought a part 8 claim seeking declarations that the Resolution was invalid.

Nature of the claim / relief sought: The claimant sought declarations that the Extraordinary Resolution passed at the noteholders' meeting was invalid on three grounds: (1) it was ultra vires the majority's powers (in substance an expropriation); (2) votes counted in favour were void because those voting held the Notes for the Bank contrary to paragraph 13; and (3) the Resolution was an abuse of the majority power because it was oppressive and unfair to the dissenting minority.

Issues for decision: The court framed the main issues as (i) the scope of the majority's power under paragraph 18 in light of paragraph 5(b); (ii) whether paragraph 13 disentitled to vote those whose exchange offers had been accepted (and if so, at what time the test applies); (iii) whether exchange contracts were specifically enforceable and thus conferred a beneficial interest; and (iv) whether the majority's passing of the Resolution amounted to an abuse of power.

Reasoning and subsidiary findings:

• Construction of powers: The judge concluded that paragraph 5(b)'s special quorum for reduction or cancellation of principal or interest demonstrates that the parties contemplated that paragraph 18 could authorise modifications tantamount to cancellation or reduction of rights, so a purposive narrow construction excluding all such outcomes would be inconsistent with the Trust Deed taken as a whole.
• Timing and scope of paragraph 13 prohibition: The prohibition against the Issuer or its subsidiaries voting Notes "beneficially held by it or for its account" is to be tested as at the time of the meeting. The judge rejected a broad reading that would treat mere contractual commitments to vote as caught unless they had resulted in a proprietary or equivalent beneficial interest by the meeting.
• Specific performance and beneficial interest: Exchange contracts accepted by the Bank on the day before the meeting were specifically enforceable because damages would not be adequate (the purpose of the exchange was to terminate the market and effect restructuring). Specific enforceability meant the Bank obtained a beneficial interest in the accepted Notes from acceptance, such that those holders' votes were disenfranchised by paragraph 13.
• Abuse of power: Even if paragraph 13 did not apply, the judge held that exit consents of the kind used here are coercive by design and that it is unlawful for a majority to assist in coercing a minority by voting to expropriate minority rights for nominal consideration. That use of majority power was oppressive and therefore an abuse.

Disposition: The claimant failed on the ultra vires submission (first limb) but succeeded on the two remaining limbs. The court granted declarations in the claimant's favour; the parties were to address the precise form of declarations and consequential relief.

First instance: The court held that the claimant's ultra vires challenge to the Resolution failed because paragraph 5(b) of Schedule 3 indicated the Trust Deed contemplated reductions or cancellations of principal or interest and so paragraph 18 could reach severe modifications. However, the claimant succeeded on two independent grounds: (1) the votes counted in favour of the Resolution were void under paragraph 13 because notes whose exchange was accepted conferred a beneficial interest on the Bank (the exchange contracts were specifically enforceable), and (2) even if paragraph 13 did not apply, the majority's support for an exit-consent resolution that operated as coercive expropriation of a dissenting minority was an abuse of power. Declarations were ordered in the claimant's favour; the court to hear submissions on their precise form.