Standard Chartered PLC v Guaranty Nominees Ltd & Ors

The court was asked to resolve how dividends on perpetual preference shares, which refer to "Three Month LIBOR" by a defined succession of measures, should be calculated after the cessation of published USD LIBOR. The judges held that the phrase "three month US dollar LIBOR in effect" in the Third Fallback must be read temporally (a previously published rate "in effect" on the relevant date) and did not authorise the bank to adopt any substitute that merely "replicates or replaces" LIBOR in a broad sense. The court nonetheless implied a contractual term because the fallback machinery had become inoperable: when the express definition of Three Month LIBOR cannot be operated, dividends are to be calculated by reference to the reasonable alternative rate to three month USD LIBOR at the dividend calculation date. The court rejected the defendants' proposed implied term that cessation of LIBOR should trigger automatic redemption. Applying the contractual and commercial principles governing implication and long-term financial contracts (Marks & Spencer v BNP Paribas; Sudbrook Trading v Eggleton and related authorities), the court found on the evidence that three month CME Term SOFR plus the ISDA fixed spread adjustment is, as at the hearing, the reasonable alternative rate.

This Financial Markets Test Case arose from the cessation of publication of USD LIBOR and concerns perpetual preference shares issued by Standard Chartered in 2006. The shares paid a fixed rate until 30 January 2017 and thereafter at a floating rate of 1.51% plus Three Month LIBOR, where "Three Month LIBOR" was defined by a primary mechanism and three successive fallbacks. The First and Second Fallbacks required contemporaneous bank quotations; the Third Fallback provided for "three month US dollar LIBOR in effect" on the relevant date.

Parties and issues

• The claimant: Standard Chartered PLC (issuer of the preference shares).
• The defendants: the registered nominee shareholder (Guaranty Nominees Limited) and a group of ADS holders (the Funds) who opposed the relief sought.
• The relief sought: declarations as to the rate by reference to which dividends should be calculated for dividend periods on or after 30 October 2024 following the cessation of USD LIBOR publication.

Procedural posture

The matter was heard under the Financial Markets Test Case Scheme in the Commercial Court by a two-judge Divisional Court (Chancellor and Mr Justice). The Funds were joined to the claim and served expert evidence. The court heard competing construction and implied-term arguments and conflicting expert evidence on alternative benchmark rates.

Issues considered

• How to construe the words "three month US dollar LIBOR in effect" in the Third Fallback.
• Whether a contractual term should be implied (and, if so, its content) to deal with the cessation of the LIBOR publication.
• Whether, alternatively, the court should imply an obligation to redeem the preference shares on cessation of LIBOR.
• On the facts and expert evidence, whether CME Term SOFR plus the ISDA fixed spread adjustment is the reasonable alternative rate.

Court's reasoning (concise)

• The phrase "in effect" in the Third Fallback bears a temporal meaning (a previously published LIBOR rate treated as operative on the relevant date) and does not authorise a broad purposive substitution that permits any rate that "effectively replicates" LIBOR.
• The LIBOR reference in the contract is a non-essential piece of "machinery" whose inoperability does not defeat the substantive bargain; commercial and precedent authorities allow the court to step into non-operable quantification machinery to preserve the contract (e.g. Sudbrook, Didymi, related authorities).
• Applying the Marks & Spencer test for implication, and having regard to the long-term nature of the instrument and regulatory context for Tier 1 capital, it was necessary to imply a term that dividends be calculated by reference to a reasonable alternative rate when the express definition cannot be operated. That implied term is objective, for the court to enforce, and accommodates changes in available alternatives over time.
• The Funds' proposed implied term requiring automatic redemption failed: it was not necessary for business efficacy, conflicted with express contractual and legal restrictions on redemption (Companies Act 2006 and regulatory constraints), was not "obvious", and was imprecise as to several core matters.
• On the expert evidence (joint points of agreement and competing analyses), the court concluded that the Proposed Rate — three month CME Term SOFR plus the ISDA fixed spread adjustment — was, at the date of the hearing, the reasonable alternative rate to three month USD LIBOR for dividend calculation.

Outcome: The court rejected Standard Chartered's construction argument, implied an objective term providing for a reasonable alternative rate where the definition is inoperable, and declared that CME Term SOFR plus the ISDA spread adjustment is the reasonable alternative rate on the evidence before the court.

This first-instance determination rejected the Claimant's construction that the Third Fallback allowed any rate that "effectively" replicated LIBOR. Instead the court implied a term that, where the express definition of Three Month LIBOR cannot be operated, dividends are to be calculated by reference to the reasonable alternative rate to three month USD LIBOR on the dividend date. The court declined to imply an automatic redemption obligation advanced by the Funds because such a term was unnecessary for business efficacy, inconsistent with express terms and statutory/regulatory constraints, and insufficiently clear. On the evidence the court found that three month CME Term SOFR plus the ISDA fixed spread adjustment was the reasonable alternative rate.