UK: Myers v Kestrel – The Limits Of The Doctrine Of Minority Oppression

Last Updated: 19 May 2015
Article by Stephen Phillips

​Financially stressed companies often seek to agree significant changes of the terms of their debts with their lenders outside of a formal insolvency process. It is not unusual for borrowers to be able to persuade a majority of creditors to agree to radical amendments, often in the teeth of objection from minority creditors.

This Client Alert highlights some recent key case law relating to the protection of dissenting creditors using the doctrine of minority oppression. It also discusses a more recent case, where a judge declined to use this doctrine.

Introduction

In the UK, market bonds or notes and even syndicated bank debts (which we will refer to collectively as "Notes") often include a threshold percentage which, assuming the relevant majority of noteholders have consented, enables the issuer of debt to amend the terms of Notes. In recent years there have been two cases – Assénagon Asset Management SA v IBRC and Azevedo v Imcopa – which we discuss below and which examine the rights of Noteholders who do not agree to the proposed changes.

More recently there has been another decision – Myers v Kestrel Acquisitions Limited – which addresses the limits on the ability of Note issuers to vary the rights attaching to the Notes they have issued. Unlike Assénagon and Azevedo, which focussed on arguments between the majority holders versus the minority holders, the key focus of Myers v Kestrel was whether issuers of debt have duties towards Noteholders when making amendments to Notes.

We have summarised the three recent key cases below and discuss the impact of these cases for borrowers seeking amendments to their debt terms.

What happened in Myers?

The Myers were the beneficial owners of Swift Advances PLC ("Swift"), a company involved in sub-prime lending. In 2004 they sold Swift to Kestrel Acquisitions Limited ("Kestrel"). Kestrel paid part of the price by issuing vendor loan notes ("VLNs") to the Myers.

Kestrel funded the acquisition largely by issuing unsecured discounted loan notes ("DLNs") to its indirect shareholders – Alchemy and Indigo.

The VLN instrument stated that the VLNs would rank equally with the DLNs and that Kestrel was required to amend the terms of the VLNs (without the VLN holders' consent) to ensure they remained consistent with the terms of the DLNs.

Swift suffered financial difficulties. In 2007, 2008 and 2009, Kestrel issued further "follow-on" loan notes ("FONs") to its indirect shareholders. Each time, Kestrel and its indirect shareholders amended the DLNs to postpone their maturity date and subordinate them to the FONs. Each time Kestrel amended the DLNs, it made the same amendment to the VLNs.

As a result, the VLNs were subordinated to the FONs to the tune of around £102 million and their maturity date was postponed by almost eight years.

The Myers claimed the amendments were invalid for three reasons:

  • Kestrel and its indirect shareholders should have acted in good faith when amending the DLNs and (consequently) the VLNs, because the majority of a class was trying to bind the minority (the "minority oppression" argument).
  • Kestrel should also have acted in good faith because it was exercising a contractual right to amend the loan notes without the Myers' consent.
  • The amendment was invalid because, by postponing the maturity date (potentially indefinitely), it was effectively extinguishing the Myers' rights under the loan notes.

What did the court say?

The court rejected all three arguments.

It said there was no possible minority oppression here because the Myers were the only persons holding VLNs. Kestrel was the issuer of the VLNs, and its indirect shareholders held DLNs, an entirely separate security from the VLNs. Neither Kestrel nor its indirect shareholders were in the same class as the Myers. The Myers themselves were the entire class, so there was no "majority" who could have oppressed them.

It said Kestrel did not have to act in good faith when amending the VLNs. If Kestrel had had a choice over how to exercise its right (i.e. what kind of amendment to make), that would have been a different matter. However, Kestrel was only allowed (and, indeed, was required) to make the change it made, because it was required to ensure they remained aligned with the DLNs. It had no choice in the matter.

Finally, it said that merely postponing the maturity date of the VLNs did not extinguish the Myers' rights. Swapping them for some other asset (e.g. shares) would have been unacceptable, but merely postponing repayment was permitted.

The court didn't refer to either Assénagon or Azevedo, but we think it is important to consider the Myers case in the overall context of the case law relating to amendments of debt.

Who is oppressing whom?

In Assénagon, the High Court confirmed the long-standing principle that, when the majority holders of a security try to make an amendment that will also affect the minority, they must act in good faith. In that case, Anglo Irish Bank ("AIB") allowed its bondholders to exchange their bonds for cash and/or new securities, provided they voted in favour of an amendment to the bond conditions varying the repayment amount. Those not voting in favour of the amendment would have their bonds cancelled for a nominal amount. One bondholder, who saw bonds with a face value of €17 million redeemed for only €170, challenged the amendment.

The court felt that, essentially, AIB and the majority holders were attempting to disenfranchise the minority. The court said this was a form of coercion "entirely at variance with the purpose for which majorities in a class are given power to bind minorities" and was "precisely that at which the principles restraining the abusive exercise of powers to bind minorities are aimed".

Myers affirmed this principle. However, the key point is that, in Assénagon, although AIB (the issuer) instigated the amendment that prejudiced the minority, it was the majority bondholders who approved it. In Myers, by contrast, the issuer alone implemented the amendment. This was enough to break the minority oppression argument – there was no majority doing the oppressing.

Carrot or stick?

In Azevedo, a company offered its bondholders a cash payment if they voted for an amendment to postpone the maturity date of its bonds (a so-called "carrot payment"). One of the bondholders did not vote in favour and later claimed the cash payment. It argued the carrot payment was unlawful because the bondholders were not being treated equally.

The Court of Appeal said it was perfectly lawful to offer this kind of carrot payment. The court agreed that English insolvency law requires members of a single class to be treated equally (the "pari passu" principle). However, it said that there was no insolvency question in Azevedo and the pari passu principle could only be invoked using the bond instrument. As it turned out, there was a trust arrangement in place which required the trustee to hold all amounts it received on trust for the bondholders equally and rateably. However, no monies were ever paid to the trustee, so this requirement never arose and the pari passu principle never became relevant.

The disgruntled bondholder also argued that the payment was a bribe, but the court disagreed, noting that the payment was available to all bondholders and was not made in secret.

Azevedo was seen by the market as merely endorsing a practice already common in practice. The carrot payments contrasted with the aggressive coercion techniques in Assénagon, where bonds were expropriated for virtually no value (not standard commercial practice).

What Azevedo and Myers share, in common and with established case law, is that postponing the maturity date of bonds or notes does not fundamentally alter the holders' rights. So, in Myers, subordinating the VLNs to the FONs and postponing their maturity date was within Kestrel's powers, even though it did not need the VLN holders' consent. However, exchanging bonds or notes for something entirely different (e.g. cash or shares) would not have been acceptable.

What are the implications?

To our frustration, Myers, Azevedo and Assénagon all dance around a similar campfire but their differences make them hard to reconcile in practice.

Minority oppression was not argued in Azevedo. The decision in Assénagon was not appealed. Myers is constrained to a rather particular arrangement that is unusual in practice, under which Kestrel's powers to amend the DLNs essentially gave it free reign to amend the VLNs without consulting the VLN holders.

Azevedo and Assénagon, in particular, are hard to read together. It would appear the court is more sympathetic to inducing Noteholder consent using a "carrot" payment, but not the "stick" of a negative effect for dissenting holders, particularly where the "carrot" is not that significant in the context of the proposed deal.

We are keen to see how the English courts would react to other coercive techniques, such as 'exit consents' and 'covenant-stripping' techniques, often a feature of US capital markets practice.

It is difficult to draw any general principles from Myers. We can say quite confidently that it will not be possible to invoke an argument based on minority oppression where the issuer (or borrower) attempts to make an amendment to a debt instrument (where no creditor consent threshold is required), rather than an amendment that requires the majority noteholders' consent. Because the issuer is the borrower, rather than a lender, it is not a member of the class of creditors and so logically cannot form part of the majority. However, terms that specifically allow a borrower to make amendments to debt instruments without creditors' consent are unusual for understandable reasons.

The decision may, however, have implications for junior and mezzanine lenders where there is an intercreditor agreement between the two tranches, and that intercreditor agreement allows the senior lenders to "drag" the junior lenders into an amendment to conform the junior debt to corresponding amendment to the senior debt. This term is now rare in transactions but is not unheard of.

The decision in Myers makes it clear that minority oppression can occur only if the creditors take action that affects a minority in the same class. In Myers, the creditors under one set of Notes agreed to an amendment to their Notes that had a (seemingly calculated) knock-on effect on the creditors under a different set of Notes. However, because the affected creditors held a separate instrument, the court would not treat them as a single class with the creditors who were seeking the amendment. It was therefore not possible to argue minority oppression of one class against another.

In the senior-mezzanine lenders "drag" scenario described above, senior lenders might now argue, on the basis of Myers, that minority oppression arguments should not be used against them. It is also interesting to speculate how a court may consider minority oppression arguments where senior lenders make decisions that affect second lien lenders where the senior debt and second lien debt are documented in the same loan instrument. This is a not uncommon scenario and we can expect at some point to see minority oppression arguments ventilated in the courts in this context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Stephen Phillips
Events from this Firm
21 Sep 2018, Conference, Florida, United States

Employment partner, Michael Weil will be participating in The Intellectual Property Law Institute’s 2018 Conference.

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions