In Part 8 proceedings in Citibank, N.A., London Branch v Oceanwood Opportunities Master Fund, the English High Court grappled with an Indenture governed by New York law and an Intercreditor Agreement (ICA) governed by English law). A matrix of documents governed variously by New York law or English law is not uncommon in high-yield note issuances. The case therefore raised an issue of wider interest for corporate trustees.
As part of the security package there was also a Share Pledge (governed by Norwegian law —though this was not relevant to these particular proceedings) in favor of Citibank as pledgee in its capacity as Security Agent. The Share Pledge created security over the shares in the Issuer of the notes.
The Court heard a jurisdiction challenge by a minority noteholder (one of the protagonists) prior to the trial of the main issue. The minority noteholder argued that, because the dispute arose under the New York law-governed Indenture, the dispute should be heard in the New York courts.
However, the Court ruled in favor of English jurisdiction on February 19, then heard the arguments on the main issue in late February, and gave judgment on the main issue on March 8, demonstrating the speed with which an action can be dealt with under the Financial List. The Court acted with urgency due to serious concern that the business of the Issuer’s group could collapse.
Citibank as Note Trustee and Security Agent issued the proceedings in order to obtain directions from the Court as to who made up a directing group (Instructing Group) for the purposes of the documents, and in particular whether or not Citibank should, or was entitled to, follow instructions from an Instructing Group that included Oceanwood (the majority noteholder), since Citibank wished to have appropriate creditor approval for the enforcement process. Citibank joined the majority noteholder and the minority noteholder in the proceedings since they were the main protagonists, and had expected to have no further role on the main question concerning “control” (see below) while the protagonists fought that matter out before the Court. Citibank was neutral as to the outcome of that question. Citibank did take a position on the jurisdiction question, supporting the jurisdiction of the English courts.
However, the minority noteholder (Foxhill) decided not to participate in the main proceedings so as not to prejudice its stance that only the New York courts had jurisdiction in light of the jurisdiction clauses in the documents (Foxhill had already commenced proceedings in New York, which the New York judge had stayed pending the outcome of the English proceedings). To ensure there was proper argument before the Court in the main proceedings, Citibank made available its junior counsel to put forward Foxhill’s position (based on evidential material and a letter setting out Foxhill’s case earlier provided by Foxhill’s solicitors).
Accordingly, the English High Court in the main proceedings had to decide an issue of New York law, under some pressure to come to a speedy determination, with the arguments of one of the protagonists put forward by the Note Trustee’s own counsel.
The judge was “as satisfied as [he] can be that in the circumstances” he had heard sufficient argument to enable him “to reach a conclusion on the issues before me notwithstanding the absence of one of the two main protagonists…The technical force of this judgment, in the absence of Foxhill, will remain to be judged, depending on the circumstances in which it is relied on. Citibank considers that a decision reached on this basis will serve its purposes.”
The Jurisdiction Issue: English Courts or New York Courts?
The Court had to decide whether the English courts or the courts of New York should hear the dispute in light of the apparently competing jurisdiction clauses in the New York law Indenture and the English law ICA. The Court regarded this as a question of construction of those clauses. The Court decided that the English courts had jurisdiction on the basis of the issues formulated by the parties and the application of those issues to the terms of the jurisdiction clauses. In the judge’s view, it was necessary to “understand the nature of these issues [viz, the issues so formulated] for the purposes of the jurisdiction debate” in order to determine whether the Court’s decision arose “out of or in connection with” the ICA (the language of the jurisdiction clause in the ICA).
The Court’s conclusion underscores the importance in Part 8 proceedings of identifying and formulating the issues.
The Main Issue: Was the Majority Noteholder Disenfranchised
Section 2.09 of the Indenture reads:
In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by… any Person directly or indirectly controlling… the Issuer or any Guarantor, will be considered as though not outstanding…
Since the Indenture was governed by New York law, Section 2.09 would be construed in accordance with New York law. Having heard New York law experts (between whom there was little dispute concerning New York principles of construction), the judge considered that most of the principles of construction of commercial contracts under New York law were “entirely familiar” to English common law lawyers. He summarized these as follows:
- Where a contract is unambiguous, its meaning should be found within the four corners of the contract, giving practical interpretation to the language employed and the parties' reasonable expectations.
- In interpreting a contract, the court should arrive at a construction which gives a fair meaning to all the language employed by the parties to reach a practical interpretation in order to realise the reasonable expectations of the parties. This is not necessarily a literal interpretation. The expectations of businessmen should be considered in relation to business contracts.
- The factual context of the contract is capable [of being] relevant to interpretation.
- A contract should not be construed to produce a commercially unreasonable result, at least if an interpretation is available which will prevent that.
- Headings to clauses can in principle be used as a guide to construction, but not if the contract forbids it.
- Where the words of a contract mirror the words of a statute, determinations as to the statutory effect may be a guide to construction, but they are not necessarily determinative.
- The court should avoid (if possible) a construction which gives rise to an inconsistency with another part of the contract.
Did Oceanwood Have “Control” By Virtue of Holding a Majority of the Notes?
Foxhill argued that, since Citibank as Security Agent could, pursuant to the terms of the Share Pledge (an “Acceleration Event” having occurred), vote the Issuer’s shares, and because Citibank had to act as instructed by the majority of the noteholders, Oceanwood therefore “controlled” the Issuer by virtue of its holding the majority of the notes. Such “control” was demonstrated when Citibank convened an EGM of the Issuer and exercised the voting rights attached to the pledged shares to replace the board of the Issuer, following a direction from the majority of the noteholders, including Oceanwood.
The Court disagreed with Foxhill — deciding instead that the Indenture and the ICA had to be viewed as “part of the same package,” and that included providing for the views of the majority of the noteholders to prevail in relation to matters concerning security enforcement, “on the obvious assumption that the interests of the majority creditors should be acknowledged and served.”
The voting of the Issuer’s shares pursuant to the Share Pledge was just one method of enforcement of the security package, the Court deemed. According to the Court, it would be an “absurd” conclusion for Oceanwood, which held the greatest interest in the notes, to be disqualified simply as a result of the size of that interest from giving or participating in any directions concerning enforcement of the security. Therefore, for there to be “control” for the purposes of Section 2.09 of the Indenture, it had to arise outside these documents. The relevant provisions of these documents were concerned with how to manage the security which had been granted, including, if it became relevant, how to vote the Issuer’s shares. In the view of the Court, Foxhill’s remedies for any “abuse of power” lay elsewhere: “in these agreements it would be very odd to say it lies in taking away the power in order to remove any risk.” The judge succinctly summarized his conclusion — “Whatever else control may mean (and it is not necessary to define it precisely) it cannot mean being a 51% noteholder. A documentary scheme which allows for majority noteholder control cannot be sensibly operated on the footing that becoming a majority costs it its vote.”
Did Oceanwood Have “De Facto Control”?
Foxhill also argued that Oceanwood had “de facto” control of the Issuer. The Court rejected this as well. Although the judge said that the “word ‘controlling’ is a wide word capable covering matters beyond equity-based control” and so could extend to de facto control, in his view Oceanwood’s actions in respect of the security were to further its interests as a noteholder rather than in the interests of the Issuer and in conflict with the noteholders. In the judge’s view, Oceanwood’s relationship to the Issuer was “influence which is exercised for the noteholders in their capacity as noteholders for the benefit of the noteholders…no reasonable businessman on either side of the transaction would have treated it as [control] in the context of Section 2.09” (and in “the present context [the word “control”] must be given a businessman’s interpretation, in accordance with New York law principles”). Further, none of its actions were sufficiently “pervasive,” a description which the Court regarded as a useful touchstone:
It is a useful word to encapsulate the degree of control required because it distinguishes areas of limited control from the sort of serious case [that control in this context required]. It does, of course, itself introduce questions of fact and degree, but it does at least connote the extent to which there has to be exercisable influence…
Although it might be said that Oceanwood had a limited degree of control of those matters it had the ability to veto, even taken together Oceanwood did not have the “pervasive” degree of influence needed to amount to control of the Issuer for the purposes of Section 2.09 of the Indenture. Positive control over the actual activities “is much more important and is apparently absent…”
Accordingly, the Court held that Oceanwood constituted the Instructing Group for the purposes of the ICA and was not to be disregarded by virtue of Section 2.09 of the Indenture.
English Courts Again Take a Commercial Approach
It will be reassuring to many parties that the English courts have again taken a commercial approach to matters of contractual construction of documents relating to complex financial arrangements between sophisticated parties. The decision of the Court on the main issue is perhaps not wholly surprising. How the Court arrived at that decision will be of interest to those who operate or advise in these markets. It would seem that the Court would have reached the same conclusions if English law governed the Indenture.