English High Court Decision

UK Court judgment on the meaning of “control” for the purpose of noteholder enforcement

The English High Court has interpreted the standard Treasury Notes provision in a New York law governed indenture and held that a majority senior secured noteholder (the “Majority”) did not control the issuer of €290 million 11.75% senior secured notes (the “SNNs”), either by virtue of its majority holding in the SSNs or on the basis that it had de facto control over the issuer.  Accordingly, the Majority was entitled to instruct the security agent to enforce the share security.

In doing so, the English court found it had jurisdiction to hear the dispute by virtue of an English jurisdiction clause in the applicable intercreditor agreement, despite the fact that the indenture itself contained a jurisdiction clause in favour of the New York courts.

The case illustrated the English court’s ability and willingness to resolve complex disputes extremely rapidly when circumstances require it do so – the case was finally resolved in just over two months from start to finish,

Background

The Norske Skog group is a large Norwegian group of companies engaged in paper manufacturing (“Norske”). In 2015, Norske’s principal operating company, Norske Skog AS (“NSAS”) issued the SSNs. In doing so, it entered into the following financing agreements with certain creditors: (a) a New York law governed note indenture (the “Indenture”); (b) an English law governed inter-creditor agreement (the “ICA”), which governed the relationship between various classes of creditors (including the SSN holders), the security agent and the security trustee (“Citi”); and (c) a share pledge agreement (the “Share Pledge”), which pledged the shares in NSAS as security for the SSNs (the “Loan Documents”).

Norske had a complicated capital structure.  During the course of 2016 and 2017, it held protracted restructuring discussions with its creditors across all classes, but it did not prove possible to agree a consensual deal. In July 2017, NSAS defaulted on the SSNs. In August 2017, the Majority and other SSN holders directed Citi to accelerate the SSNs. In November 2017, it was announced that there would be a public sale process of the secured shares; and the Majority, which held at that stage more than 51% of the SSNs, would, together with a joint venture partner, act as a backstop bidder.

Pursuant to the terms of the Loan Documents, the sale of the secured shares would require the involvement of Citi, which would in turn require instruction from the Majority in order to take the required steps.

Dispute

Clause 11.2 of the ICA provided that an “Instructing Group” constituted the SSN holders which, at the time of issuing the instruction, held more than 50% of the SSNs.

Section 2.09 of the Indenture (“Section 2.09”) states:

“Section 2.09 Treasury Notes

In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer or any Guarantor, or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any Guarantor, will be considered as though not outstanding, except that for the purposes of determining whether the Trustee will be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned will be so disregarded.”

A group of minority SSN holders (the “Minority”) raised concerns with Citi that the Majority was not an Instructing Group under the ICA because the Majority held more than 50% of the SSNs and, as a result, was able to direct Citi to vote NSAS’ shares. This, in turn, meant that the Majority exercised “control” over NSAS within the meaning of Section 2.09, such that its SSNs were not capable of being taken into account for the purpose of identifying an Instructing Group under the ICA.

Citi applied to the English Court for a direction on the primary issue of whether any instruction given by the Majority to Citi was an instruction by an Instructing Group under Clause 11.2 of the ICA.

Expedition

At a preliminary hearing in January 2018, the English court agreed that the threat of an uncontrolled insolvency of NSAS, with consequent loss of jobs and value for all stakeholders, meant that there was a pressing need for the dispute to be resolved as soon as possible and, in any event, by around the end of February 2018.

Jurisdiction

The ICA contained a provision which provided the English Court with exclusive jurisdiction to settle any dispute arising “out of or in connection with” the ICA. The Indenture contained a provision which provided that each party irrevocably agreed that any suit, action or proceeding “arising out of, related to, or in connection with” the Indenture “may” be commenced in the New York State and Federal Courts, and that they irrevocably waive any objection to such proceedings being instituted.

When interpreting competing jurisdiction clauses, the Court starts with the presumption that the parties, as rational businessmen, are likely to have intended that any dispute arising out of the same relationship should be determined by the same Court or tribunal[1].

The Minority argued that the Indenture jurisdiction clause gave the New York Courts exclusive and mandatory jurisdiction over the dispute. In particular, the Minority considered that the real issues concerned the meaning of “control” under Section 2.09 of the Indenture, rather than any dispute about the interpretation of the ICA.

Citi and the Majority argued that under Article 25 the recast Brussels Regulation[2], the English Court had no choice but to give effect to the ICA’s exclusive jurisdiction clause; and that each jurisdiction clause should be interpreted so as to give effect to what a reasonable businessman would expect, which was not to allow a fragmentation of disputes or inconsistent jurisdictional decisions. As such, the ICA jurisdiction clause gave the English Court exclusive jurisdiction and the interpretation of the Indenture was simply a necessary step in answering the question of whether the Majority had a right to give an instruction under the ICA.

The Court held that the substantive dispute “arose out of or in connection with” the ICA and it was of no consequence that the Court had to look to the Indenture as a step in identifying the dispute. There were several indicators of the ICA’s jurisdiction clause being of central importance to the transaction structure, including that the Indenture cross-referred to, and gave a degree of express priority to, the ICA; and that the ICA governed rights of unsecured creditors who were not party to the Indenture. Further, the Court considered that the reasonable businessman would not expect his dispute under the ICA to be heard in New York.

Having established that it had jurisdiction to determine the dispute, the English Court went on to consider in a separate hearing the substantive issue of control.

Control

Interpreting Section 2.09 required the English Court to apply New York law principles of contractual construction which the Court held were similar to the equivalent English law principles.

51% Control

The Court held that the ICA and the Indenture should be read together and that the whole thrust of the control provisions in those documents was to give the majority SSN holder power. The Minority’s position was “absurd” because it would cut across the “sense and logic” of the ICA and the Indenture by depriving the majority secured creditor of the benefit of its security “at the moment when it matters most (when there is a repayment problem)”. The control referred to in Section 2.09 did not include the consequences of working out of the arrangements in the Loan Documents and which arose under the documents themselves. As a result, the control referred to in Section 2,09 must be control which arises other than under the Loan Documents.

De facto control

The Court therefore went on to consider whether the Majority’s interest in the SSNs should be disregarded on the basis that it exercised de facto control. The Court considered that what amounts to sufficient “control” for the purpose of Section 2.09 is a question of degree, which will turn on the facts of each particular case. On the facts of this case, the Court held that, in order to amount to control for the purposes of Section 2.09, the Majority’s control of NSAS would have needed to have been “pervasive” and “from the Issuer side of the line” (as opposed to having arisen from the exercise of the Majority’s contractual rights as creditor), noting that, in this case, the paradigm example was that of “a controlling shareholder”.

The Minority’s position was that the Majority exercised control as a result of its “real world economic power” by virtue of its having provided finance to NSAS via a liquidity facility and a trade guarantee facility, having entered into a standstill agreement with NSAS, and by the appointment of a board director.

The Court held that the financing arrangements and standstill agreements amounted to a power of veto but not pervasive positive control over NSAS; and that there was insufficient evidence to establish that the board director appointed by the Majority would simply follow the Majority’s instructions in breach of his fiduciary duties to act in the best interests of NSAS.

Everything that the Majority was alleged to have done was pursuant to its interests as a creditor (and for a time in conjunction with other creditors) and to further its interests as creditor and, in any event, were not sufficiently “pervasive” to give it the necessary degree of control over NSAS.