Managing the Relationships Between Members
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This chapter examines how relationships within the ad hoc committee are managed inter se. It aims to assess such relationships from a practical and operational perspective by reference to the conventions in the restructuring market, and as a legal matter. It is worth reiterating the general theme and understanding in this book that ad hoc committees are unique, informal groupings of similarly situated stakeholders offering several key benefits, through collaboration and collective action that may be attractive to individual holders looking to have a stronger voice or defray costs. Virtually any economic stakeholders may choose to form an ad hoc committee to pursue their collective interests – the market has seen equity investors, tort claimants, bondholders, lenders or a more generic group of similarly situated creditors, such as unsecured or secured creditors form committees.
While this chapter is written from the perspective that the appointment of an ad hoc committee is always informal, there are a number of occasions where that informal appointment is reduced to written terms agreed between the members of the committee inter se and occasionally the company. Although the appointment of the ad hoc committee might occasionally be recorded in writing, this does not mean that it is a formal committee, and it is certainly not envisaged that such a committee will have a formal style or that it adopts by-laws, subcommittees, chairpersons and regular formal processes for meetings. Ad hoc committees are typically managed much more informally and, as one would suspect, the written terms amplify the informal and non-fiduciary nature of the relationships and only reflect generic cooperation terms or a basic ‘joint interest’ agreement, and may only tend to involve the company to procure indemnification of the ad hoc committee by the company.
While ad hoc committees do not have extensive written terms the same cannot be said about formal steering committees appointed pursuant to the Loan Market Association (LMA) standard forms or perhaps the enhanced terms of the legal advisers to the steering committee who way elect to use a more bespoke or amended form that navigates certain of the perceived weaknesses of the LMA documentation.
The relationship of an ad hoc committee with its stakeholder constituency
No power to bind: the importance of the underlying finance documents in relation to decision-making
As a starting point, it is not the function of an ad hoc committee to bind the stakeholder constituencies that it derives from. As a matter of contract, the scope, process and machinery for binding the constituency on important issues relating to the credit of the issuer will already be subject to the prescribed arrangements in the underlying financing documents, whether this is a facility agreement, a bond indenture, a private placement note-purchase agreement or other debt instrument, including an intercreditor agreement that may regulate a number of debt instruments and the relevant constituencies that hold them. In reality, it will be these documents that will determine how the relevant financial creditors are able to contractually bind and interact with each other. Quite often, the relevant instruments will provide for qualified or majority decision-making, and on fundamental credit matters, such as maturity, coupon variation, payment sharing, mandatory prepayment, nature and scope of security, and priority and subordination, unanimity will almost always be required.
The scope and purpose of the role as regards the stakeholder constituency
As separately highlighted in Chapter 2 on the role and purpose of an ad hoc committee from the perspective of creditors, the role of an ad hoc committee is almost always informally scoped as being one of liaison as between stakeholders, circulation and dissemination of information, and the provision of feedback and coordination. Such actions on the part of an ad hoc committee will always be at the absolute discretion of the members, and in professionally managed arrangements the role will operate and – if reduced to writing in a cooperation or similar informal joint interest agreement – be framed (for the benefit of each member) as creating no obligations or responsibilities to either the issuer, the wider stakeholders or the individual members. In particular, there will be an express provision that the ad hoc committee will have no obligation to consult with any person, including each other.
Inevitably, the ability of a member of a stakeholder group to discharge any such informal role on an ad hoc committee will depend upon whether it employs skilled practitioners with the appropriate restructuring and turnaround experience and expertise. It is also important that the relevant ad hoc committee member can articulate the views of the broader constituency that it represents and that it has a reputation for transparency and veracity, so that the relationship with the stakeholder constituency is a productive one.
Powers, duties, obligations and responsibilities, and appropriate exclusions
The imposition of duties, obligations, responsibilities and even powers will be resisted by the ad hoc committee at every turn to minimise its potential liability. Even in a cooperation or similar informal joint interest agreement where there has been a reduction to writing of the role, an ad hoc committee will purport to retain an informal status at all times. Moreover, unlike official committees in bankruptcies or more formulaic coordinating or steering committees appointed on precise pre-agreed LMA-style terms with other stakeholders or specific official creditors’ committees appointed by the US Trustee in a Chapter 11 bankruptcy, ad hoc committees and their members do not accept or contemplate any fiduciary duties to the broader stakeholder group and they will seek to exclude any notion of this, or indeed, any form of representation in written communications, in any calls and in any documentation that might relate to their formation.
The possibility of a fiduciary duty
The US position
Despite the active exclusion in documentation and all communications of any form of fiduciary duty being owed by an ad hoc committee to a stakeholder constituency, two US cases have highlighted the possibility that such duties may be owed by ad hoc committees and why in any cooperation or similar agreement, any such notions are expressly excluded. This development has been founded on the broad equitable power granted to judges under Chapter 11 of the US Bankruptcy Code to make any necessary determinations to prevent an abuse of process. Indeed, pursuant to 11 United States Code (USC) Section 105(a):
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
In the first case relating to this issue – In re Northwest Airlines Corp, an ad hoc committee of equity security holders attempted to file its Rule 2019 (pre-2011 amendments to the Bankruptcy Code) disclosure under seal. This was designed to protect from scrutiny the identity of the key holders in the class and other sensitive information detailing the time and purchase price of those individual holders. Judge Gropper rationalised the requirement for full disclosure in the case by declaring that the disclosure of such information by those holders ‘is not unfair because their negotiating decisions as a Committee should be based on the interests of the entire shareholders’ group, not their individual financial advantage’. The obvious implication of this – that the committee was representing a larger group than its actual members and was acting for the group in unison – caused concern that the committee had responsibilities beyond the narrow interests of its own members. From this perspective, it is not a quantum leap to suggest that the committee had some sort of indirect fiduciary characteristics that should be owed to the class as a whole.
Rather surprisingly, Judge Gropper labelled the informal committee in Northwest Airlines as ‘champions of the larger group [which gave] other members of the class the right to know where their champions are coming from’. The concern with the perception of an ad hoc committee as champions of a class has been articulated by David L Perechocky; he correctly observed in his excellent article: ‘a champion is one that acts on behalf of others. The fact that a subset of the equity shareholders are acting together as shareholders means that the members of the subset may owe fiduciary duties to act on behalf of all equity shareholders.’ Although Judge Gropper raised the possibility (albeit a remote one) of a fiduciary, further elaboration on the nature of those duties was left unresolved.
In the subsequent case of In re Washington Mutual Inc in 2009, which was a further Rule 2019 (pre-2011 amendments to the Bankruptcy Code) disclosure case (where the WMI Noteholders Group was similarly resisting disclosures of the Group’s holdings), Judge Walrath commented that ‘[t]he WMI Noteholders Group’s argument is premised on the erroneous assumption that the Group owes no fiduciary duties to other similarly situated creditors, either in or outside the Group. The case law, however, suggests that members of a class of creditors may owe fiduciary duties to other members of the class.’
Judge Walrath confirmed that, in her view, this fiduciary duty was implied. She did not, however, provide further elaboration on the legal basis for implying this duty and exactly where it had emanated from, and it is assumed that this duty was imposed by the court as a result of the broad equitable powers granted to judges pursuant to 11 USC Section 105(a), as referred to above. As David L Perechocky properly observes, these judicial developments in the US are unhelpful because they do not clearly identify the basis or nature of the duties, who they are owed to and what the implications of a breach are. As a corollary, the author of this chapter would be concerned that a court might seek to invalidate express exclusions of fiduciary duties and associated liabilities articulated by an ad hoc committee. At present, practitioners and financial institutions assuming committee roles in the US are left in the uncertain and uneasy position of having a potential fiduciary obligation imposed without knowing the scope of it.
The English law position
Given the possibility that a fiduciary duty can be imposed on members of an ad hoc committee under US law, it is important to analyse the risk of this under English law. A fiduciary relationship arises under English common law where A and B agree expressly or impliedly that A will act on behalf of or for the benefit of B in circumstances that give rise to a relationship of trust and confidence. A must have some discretion or power that affects B’s interests and B, in turn, relies on A for information or advice. Examples of such relationships under English law include partners to fellow partners; solicitors or professional advisers to clients; and agents to principals.
While a fiduciary relationship may exist in circumstances other than those traditionally recognised above, such a relationship is not readily presumed to exist under English law. In determining whether a relationship is fiduciary in nature, the substance of the relationship must be examined in light of its commercial context and the entirety of the obligations undertaken. A likely impediment to a finding of a fiduciary relationship in an ad hoc committee scenario under English law is that there is invariably no agreement (even implied) that the committee will act on behalf of or for the benefit of any stakeholder or other member, let alone in circumstances that give rise to a relationship of trust and confidence. Ad hoc committees are established as informal bodies with no representative role, and a well-advised committee would reject this role at every opportunity. In rare cases where the English courts have imposed a fiduciary duty, they have focused on the exchange of confidential information and restrictions on its use as possible gateways to such a relationship. In A-G v. Blake (Jonathan Cape Ltd, third party), for example, the defendant’s undertaking as to confidentiality, in the particular circumstances of being a member of one of the UK intelligence services, was held to be ‘closely akin’ to a fiduciary obligation. In an ad hoc committee context, the only potential document that an hoc committee member might conceivably sign with a company (in the absence of any indemnification or holding of harmless arrangements) will be a confidentiality undertaking, and so care must be taken to ensure that this does not create any potential fiduciary relationships either with the company or with other lenders. As a result, a recent focus in such confidentiality undertakings has been the exclusion of any notion of a fiduciary relationship such that an implied fiduciary relationship is not a possibility. In any event, the exchange of confidential information is only likely to be transitory and the emergence of a fiduciary relationship is unlikely given the obligation imposed by an ad hoc committee on a company to cleanse information promptly in accordance with the Market Abuse Regulation. Accordingly the circumstances in which a member of the ad hoc constituency would receive any confidential information and retain it given the risks of market abuse for a committee member or a stakeholder that such disclosure would bring, means that the risks of a fiduciary relationship emerging due to the provision of confidential information are remote.
In assessing the risks of an ad hoc committee incurring liability as a fiduciary to other stakeholders and committee members, it is productive to analyse analogous situations and relationships in the financial markets where courts have analysed the potential emergence of a fiduciary relationship. The case law relating to the roles of arrangers and facility agents is a good starting point. In UBAF v. European American Banking Corp, a 1984 case, a bank arranging loans was held to owe fiduciary duties to other lenders. The arranger provided the syndicate with an information memorandum that included false representations about the purpose of the loans and the borrower’s financial situation. When the borrower defaulted on the loan, the syndicate successfully sought action against the arranger for, inter alia, a breach of fiduciary duty. Similarly, in United Pan-Europe Communications NV v. Deutsche Bank, it was held that an arranging bank owes fiduciary obligations to a borrower (as opposed to other financial creditors), despite the mandate letter excluding fiduciary duties. The court reached this decision on the basis that the defendant had received documents from the claimant in confidence and, thereafter, on the basis of information contained within the documents, had proceeded to purchase shares in competition with the borrower. In this case, the court imposed a fiduciary duty by upholding the broader principle that the misuse of confidential information in a financing relationship can be a possible gateway to a fiduciary relationship.
Post the UBAF case, and in the absence of misuse of confidential information as per the United Pan-Europe case, it is unlikely that a fiduciary relationship will emerge in a financing relationship or in the context of the role as a member of an ad hoc committee. The key reason for this is the universal practice of an ad hoc committee to exclude any fiduciary duties at every step of the relationship and in all correspondence and documents. The case of IFE Fund SA v. Goldman Sachs emphasises this point; and the Court of Appeal dismissed a claim that an arranger owed a fiduciary duty to the syndicate banks on the basis that the terms of the syndication memorandum expressly stated that the arranger had not verified the information contained therein and was not accepting any responsibility towards the information provided. More recently, in the case of Barclays Bank plc v. Svizera Holdings BV and another, the court rejected the proposition that an arranging bank was a fiduciary on the strength of the mandate’s disclaimer and the commercial reluctance of banks to be fiduciaries in this context.
The above cases should provide a degree of comfort to ad hoc committees, and as loan market and restructuring market practice has developed and ad hoc committees have routinely excluded liability as fiduciaries, it is highly unlikely that a committee will attract such liability in the absence of exceptional circumstances, such as the misuse of confidential information, fraud or gross negligence. In the recent case of CNM Estates (Tolworth Tower) Limited v. (1) VeCreef I SARL, (2) Venn Partners LLP, (3) Simon Peter Carvhill-Briggs, and (4) Freddy Khalastchi and Knight Frank LLP, Mr Justice Foxton upheld market standard exclusion clauses in an intercreditor agreement, security document and facility agreement that benefited a receiver and security trustee, and this case, therefore, provides a degree of comfort that similar clauses in an ad hoc cooperation or similar informal joint interest agreement are likely to be upheld
The deterrent for members of an ad hoc committee misusing such information or otherwise abusing the position on a committee is significant given the detrimental consequence of being a fiduciary under English law. In essence, if a fiduciary duty exists, a court of equity imposes special liabilities and duties upon persons who stand in a fiduciary relationship to others; and it is a principle of equity that no person having duties of a fiduciary nature to discharge should be allowed to place himself or herself in a situation where he or she has, or could have, a personal interest conflicting with the interest of those whom he or she is bound to protect. The principle is broad and flexible, but that does not undermine the strict nature of the liability where it applies.
In summary, the four key duties that would exist are as follows:
- no conflict: to avoid a conflict between the fiduciary’s self-interest and his or her fiduciary duty;
- no profit: the fiduciary must not profit from his or her position at the expense of the beneficiary of the duty;
- undivided loyalty: a fiduciary owes undivided loyalty to the beneficiary of the duty; and
- confidentiality: a fiduciary must not use or disclose information obtained in confidence from the beneficiary for the benefit of the beneficiary only.
Options analysis and proposals to stakeholders
At a certain point in a restructuring and, in particular, where an ad hoc committee has agreed to receive non-public information (almost always subject to a clearly defined cleansing process), the ad hoc committee may conduct an options analysis and may even articulate (albeit informally) to the stakeholder class its own view of a restructuring proposal or strategy in conjunction with its professional legal and financial or accounting advisers. Well-advised members will only do so on an informal and non-reliance basis with all liability fully excluded in any presentation or communication. It is also common for an ad hoc committee to exclude liability in a restructuring support agreement or a scheme, or both, or other similar document setting out the terms of a restructuring.
Limits on an ad hoc committee with voting control to bind minority stakeholders
In some cases, an ad hoc committee may well have the preponderance of the voting power in a particular stakeholder group. An ad hoc committee may also have more detailed information and a closer proximity of relationship with the company, and this may pose a potential issue for the ad hoc committee to navigate, as it interacts with both its fellow members and the broader stakeholder constituency. In this particular context, there have been some important case law developments that need to be considered, as the recent cases could determine the basis upon which an ad hoc committee can legitimately exercise votes under the main credit documentation to bind other members and the overall stakeholder constituency.
English case law potentially intrudes on the voting dynamics affecting ad hoc committees, and the principles that have emerged could possibly apply to any majority block of creditors (such as an ad hoc committee) purporting to bind a minority where English law is regulating the relevant vote. Given the relationship of the members of an ad hoc committee and its likely size, it will need to consider carefully how it participates in voting on key issues as a matter of English law, so as not to incur liability with regard to the stakeholders that are non-committee members.
When confronted by a credit of declining quality and navigating a restructuring, financial institutions (particularly those forming a majority on an ad hoc committee) inevitably identify and protect their own self interests. Historically, for those involved in restructurings as members of a pivotal ad hoc committee, the legitimacy of such conduct in the specific context of majority voting arrangements had always been an issue that a thoughtful adviser considered. Typically, providing that the ad hoc committee voted in good faith to genuinely protect their economic interests, ‘self-interest’ was permissible if the vote did not constitute a fraud on the minority. In any event, there was no substantive precedent on the point in the syndicated loan market and the only analogy that could be made was to the historic decisions relating to majority voting under instruments constituting debenture security and judicial decisions relating to shareholder voting (specifically in the context of an amendment to the articles of association of a company).
The risk of voting oppression has been considered by financial creditors since as long ago as 1927, when Viscount Haldane in the case of British American Nickel Corporation Limited and Others v. M J O’Brien Limited (a decision dealing with the powers of a majority of debenture holders to amend the underlying instrument constituting the security) resolved that there was an implied restriction on the powers of a majority of a special class of debenture holders to bind a minority – similar to the concept of ‘unfair prejudice’ towards the interests of minority shareholders. He held at page 371 of his judgment that such powers ‘must be subject to a general principle, which is applicable to all authorities conferred on majorities of classes to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members. Subject to this, the power to vote on an issue may be unrestricted.’ This principle continues to be relevant, so that when an ad hoc committee exercises its broader voting rights in connection with the underlying instrument or document that regulates the relationship of the broader stakeholder constituency with the issuer, members of the committee must do so for the legitimate purpose of benefiting the stakeholder class and not only themselves.
These principles have found similar expression in a number of subsequent authorities, and were upheld by Sir Raymond Evershed MR in the Court of Appeal in the case of Greenhalgh v. Arlene Cinemas Ltd and Others, which concerned the other analogous situation of a resolution by a majority purporting to validly alter the articles of association of a company at the expense of a minority class. The legal challenge was founded on the jurisprudential proposition that a resolution by a majority must be ‘bona fide and for the benefit of the company as a whole’. Evershed MR clarifies the meaning of this principle when he states that ‘bona fide for the benefit of the company as a whole’ means two things not one. It means that each shareholder must proceed upon what, in his or her honest opinion, is for the benefit of the company as a whole. The second is that the phrase ‘the company as a whole’ does not (in such a case as the present, at any rate) mean the company as a commercial entity, distinct from its corporators; it means the company as a general body. That is to say, the case may be taken of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favour, for that person’s benefit.
The matter can, in practice, be more precisely stated by looking at the converse scenario, whereby a resolution of this kind would be liable to be impeached if the effect of it was to discriminate between the majority shareholders and the minority shareholders so as to give the former an advantage, of which the latter were wholly deprived, such that it is oppressive of the minority. With respect to an ad hoc committee purporting to exit is worth noting that in examining cases where a resolution has been successfully attacked under English law, it is substantially on that ground.
It is possible that this line of cases historically only registered a cautionary note with practitioners and those advising ad hoc committees because, with the possible exception of the British American case, they concerned (and, in the case of Greenhalgh, were founded on) resolutions relating to an amendment of the articles of association of a company. In a restructuring scenario or a distressed syndicated loan there is no equivalent of the ‘company’ in a comparable context, merely the economic interest of holders or lenders in a pre-existing contract that had regulated the rights of those creditors inter se. Accordingly, when the respective voting rights and obligations of lenders in the context of an agreement by a majority to amend a syndicated loan facility came to be considered by Rimer J in the Chancery Division in the leading case of Redwood Master Fund Ltd v. TBD Bank Europe Ltd, it caught the attention of the restructuring market.
Since 2002, when Rimer J’s judgment was delivered, practitioners invariably refer to the ‘Redwood principles’ whenever a restructuring is to be implemented using contractual voting provisions that allow documents to be amended with majority consent. In particular, practitioners will examine whether what is proposed may be challenged by a group of dissenting minority creditors. Given the broad identification of common interests in an ad hoc committee that logically led to its very formation, and the initiation of collective (albeit informal) action via such committees, it is likely that the Redwood principles will be considered carefully by a minority of the underlying stakeholder constituency to challenge or invalidate any decision-making by a majority of the class forming the ad hoc committee that is adverse to them. As explained by Rimer J in Redwood, ‘the vice against which control on the exercise of majority power is directed is the potential for a dishonest abuse of that power.’
While the Redwood principles have increasingly permeated the voting process when ad hoc committee members vote their individual holdings under the original instrument, the judgment in Redwood should not support an overreaction with respect to ad hoc committee members exercising their voting rights in their capacity as creditors to protect their economic interests, and the case does recognise that majority voting provisions exist precisely because there are likely to be conflicts of interest between different lenders. Accordingly, the case does empower a majority to bind a dissentient minority, even though the minority will be placed in a worse position than the majority. This is an important principle to be taken from the judgment, and accordingly, it is not a straightforward process for minority creditors who oppose a proposed solution or voting resolution supported by individual members of an ad hoc committee to raise the spectre of abusive voting in a restructuring.
Few cases have actually been commenced based on these principles, and successive Queen’s Counsel have consistently advised on numerous restructuring transactions that the Redwood principles do not constitute a straightforward weapon, and much less a silver bullet for challenging the decisions of creditors protecting their own commercial interests. Indeed, at the time of writing, only one further case that relies on the Redwood principles to control oppressive majority voting, known as Assénagon, has been reported. Logically, the reason for this is that the legal basis of invoking controls on voting as a principle (which was accepted in both Redwood and Assénagon) is as an ‘implied term’ in the contract. Rimer J considered such terms relating to the exercise of voting rights might be implied into the relevant agreement on the basis that it was necessary to do so, as a matter of business efficacy, it was a matter of obvious inference that these principles were intended to apply to the contract or it was necessary to do so to give effect to the reasonable expectations of the parties. Subsequently, in Assénagon, Briggs J stated that an additional or, as he called it, a ‘true basis’ for the implication of these principles was that such terms are generally implied by the law into contracts or arrangements of particular types. This is an important point because it will mean that the party propagating the application of the Redwood principles will need to demonstrate that the parties intended to incorporate such an implied term or that it was necessary to give efficacy to the contract. In many finance documents, this may not be overly problematic, but it should still be considered whether such an implied term may have been expressly negated by the parties in the finance documents by a ‘full contract’ provision that states that an agreement records all of the terms of the contract and that no further terms shall be implied.
In the Redwood case, an international syndicate of banks agreed to make available a syndicated credit facility of €4 billion to two Dutch telecoms borrowers, UPC Distribution Holding BV and UPC Financing Partnership. Interestingly, the larger facility ‘B’ and ‘C’ lenders were, in fact, voting for the majority decision to reduce the ‘B’ facility from the proceeds of opening up the headroom in the revolving credit ‘A’ facility that they had agreed to re-open via the waiver letter they had voted for. This was to the detriment of the plaintiff and others holding the facility ‘A’ commitments.
The plaintiffs contended that the waiver was not binding because of a substantial and subjective lack of good faith on the part of the majority of the lenders that had been exercised in a manner that was in breach of their implied obligation to act in the interests of the lenders as a whole. It was argued that the waiver agreed between the banks, which required a two-thirds majority, subjected them to an unfair exposure to risk and that any power conferred on a majority of a special class that enabled it to bind the minority had to be exercised bona fide for the benefit of the class as a whole. As an alternative argument, the plaintiffs contended that viewing the matter objectively, no reasonable lender could have concluded that the modified waiver letter was in the interests of the lenders as a whole applying the same logic as in the British American case and Greenhalgh, since the effect of the letter was to obligate a sub-class of the ‘A’ facility to advance a further €30.5 million to what was perceived to be an impaired credit.
Rimer J held that in the instant case where there were three classes of lenders, it was clearly foreseeable that the commercial interests of one class of lender could differ from those of another class, especially where one of those classes was exposed to advancing further money. In a restructuring context, he accepted that it would be virtually impossible for the majority to exercise its voting powers in a manner that, viewed objectively, could be said to be for the benefit of each class. Implying a term that would substantially paralyse the company by making it impossible to carry any decisions was not the intention of the parties.
The court found that there was no evidence that the majority lenders had acted in bad faith, and that this was a commercial decision that the majority was entitled to take to approve a restructuring package that potentially benefited each creditor. There were, in fact, benefits for all (even though the financial burden of delivering those benefits fell on the ‘A’ facility lenders to advance a further €30.5 million), including a resolution of the restructuring process and the potential survival of the group, the payment of a waiver fee and an increased interest rate.
Moreover, Rimer J held in Redwood that the majority banks had no duty to act in the best interests of the minority banks since this was a commercial arrangement where, within limits, the parties could act in their own interests. The contention of Redwood as plaintiff that the changes to the terms of the facility agreement (implemented validly as a purely technical matter) pursuant to Clause 25 of the facility agreement was still subject to an implied term in the agreement that the voting powers would be exercised bona fide for the benefit of the lenders as a whole. Accordingly, Clause 25 should not simply be viewed in technical isolation and, as such, it did not accurately reflect the intention of the parties to the facility agreement. Rimer J effectively rejected this argument and again reiterated that in a restructuring context it would be virtually impossible for the majority to exercise its powers under the voting clause in a manner that, viewed objectively, could have been said to have been for the benefit of each of the lenders. Even if there had been an implied term that the lenders’ voting powers would be exercised bona fide for the benefit of each lender in each class, the waiver was not sufficiently discriminatory or unfair towards the minority.
This did not mean that the majority lenders had an absolute discretion in exercising their voting rights, and one aspect of the judgment that will require those exercising votes in a restructuring to consider the effects on a minority was Rimer J’s statement that there is still an implied term that majority lenders should exercise their voting rights ‘properly’. In assessing this, the court would consider whether the power was exercised in good faith for the purpose for which it was conferred. On the facts, however, he was satisfied that there was no evidence that the majority lenders had acted in bad faith. They had simply made a commercial decision to approve a restructuring package that potentially benefited each creditor. It is not difficult to envisage a minority of a stakeholder class making a similar point as regards a majority of a class constituting in large part an ad hoc committee. Indeed, given the commonality of interest of those sitting on the committee, the identification of their position as a potentially oppressive majority is more obvious. Having said that, on the facts and given the latitude to vote in a self-interest that is a consequence of the case, the ability of members of an ad hoc committee to bind other stakeholders in the constituency would appear to be sufficiently wide.
In this case, it is submitted that the judge perfectly anticipated the expectations of the syndicated and restructuring markets by articulating that the starting point for the courts in assessing the validity of the exercise of any voting powers was to assess by reference to the available evidence, whether the power was being exercised in good faith for the purpose for which it was conferred. He elaborated by suggesting that merely because a minority might be able to adduce evidence that it had been relatively disadvantaged as compared with the majority, it was not axiomatic that the voting power had been exercised improperly by the majority. In this regard, Redwood is a useful precedent for ad hoc committees. Indeed, members of an ad hoc committee in their capacity as creditors can take a degree of comfort that the exercise of their voting powers could only be successfully challenged in very limited circumstances. The judgment is also positive for borrowers; companies undergoing a restructuring or even merely seeking lender consent, will want to know that negotiations with their creditors will be quick and binding when they become necessary. As far as minorities are concerned, they should perhaps note that in the absence of discrimination and bad faith by a majority where a vote is being exercised for an improper purpose, they will be bound by majority decisions in a restructuring that are initiated by an ad hoc committee.
In the recent Assénagon case, the Redwood principles were applied to a consent solicitation, with respect to floating rate notes issued by Anglo Irish Bank Corporation (AIBC), which involved an exchange offer under which those holders of subordinated notes who chose to exchange their notes would receive new notes with a value of €0.20 for every €1 worth of notes tendered. Pursuant to the consent solicitation and the exchange offer, there would also be a squeeze-out whereby all holders exchanging their notes automatically voted in favour of an extraordinary resolution that amended the conditions of the notes, so as to allow AIBC to redeem any outstanding notes at an amount of €0.01 per €1,000 in principal amount of notes. If this was not of itself a discriminatory exercise of a vote that eradicated the value of any minority holder of the outstanding notes, the timing of the exchange offer was structured in an oppressive way that meant it would not be possible to accept it on the date when the extraordinary resolution was passed. The claimant (who did not participate in the exchange offer) consequently received €170 for its €17 million in face value of AIBC notes.
Briggs J at first instance supported the plaintiff’s submission that the extraordinary resolution should be overturned on the basis of both a technical disenfranchisement argument and an application of the Redwood principles. Briggs J held that:
[T]he correct question . . . is whether it can be lawful for the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority’s rights under their bonds for a nominal consideration. In my judgment the correct answer to it is in the negative. My reasons derive essentially from my understanding of the purpose of the exit consent technique. . . .
The exit consent is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less. Its only function is the intimidation of a potential minority, based upon the fear of any individual member of the class that, by rejecting the exchange and voting against the resolution, he (or it) will be left out in the cold. . . . Putting it as succinctly as I can, oppression of a minority is of the essence of exit consents of this kind, and it is precisely that at which the principles restraining the abusive exercise of powers to bind minorities are aimed.
In Assénagon, the resolution can be distinguished from the resolution in Redwood because it was clearly oppressive and discriminatory to the minority, and an abuse of the power of the majority as it expropriated their economic value for a nominal consideration and was completely incapable of benefiting the minority, unlike in Redwood, where it could be legitimately argued that the resolution potentially benefited each creditor and was not being exercised for an improper purpose. Redwood can be distinguished because the lenders had not acted in bad faith. They had simply made a commercial decision to approve a restructuring package that potentially benefited each creditor. Notwithstanding Assénagon, it should still, therefore, be possible for members of an ad hoc committee to vote in furtherance of their own economic interests where the vote is potentially capable of benefiting all members of the stakeholder constituency and is not wholly discriminatory, oppressive or designed to expropriate the economic interests of the minority. As Lord Sumption JSC stated in British Telecommunications plc v. Telefónica O2 UK Ltd: ‘It is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously. This will normally mean that it must be exercised consistently with its contractual purpose.’
Other non-fiduciary duties of an ad hoc committee in a restructuring process
As well as examining how members of an ad hoc committee are entitled to vote in a broader restructuring and affect the rights of non-members, and whether they are potential fiduciaries, it is also instructive to examine any other implied duties that ad hoc committee members may have to other members of the stakeholder constituency (who are not members) and, indeed, to each other in a restructuring process – particularly with respect to disclosure. The case of National Westminster Bank plc v. Rabobank Nederland is the leading authority on the mutual duties and obligations of institutions involved in restructurings. Although the case is often overlooked, it is of critical importance to restructuring practice and the conduct of workouts and it has broad application to all financial stakeholders in a restructuring, including ad hoc committees. In effect, the High Court held that in informal arrangements where there is an absence of an express agreement to the contrary (such as is likely to be the case in the operation of an ad hoc committee) there are only very limited duties (particularly as regards disclosure) owed between creditors engaged in a restructuring.
The litigation arose in this case in the context of the involvement of two banks in the restructuring of the Yorkshire Food Group as borrower. In March 1996, pursuant to the terms of a syndicated facility agreement under which NatWest was the agent, Rabobank and NatWest each agreed to lend Yorkshire Food Group US$50 million.
There then followed a sharp deterioration in Yorkshire Food Group’s financial performance and, by 30 July 1996, the company gave the agent notice that it might be in breach of the financial covenants in the facility agreement. The loan then became subject to intensive management by the respective restructuring teams at both banks and, by September 1996, Price Waterhouse was appointed to conduct an independent business review. Further advances were made by the banks to enable Yorkshire Food Group to continue to trade and to support the sale of its US business. By September 1997, Rabobank had devised a structured refinancing of the group and negotiated a purchase of NatWest’s debt at a substantial discount pursuant to a deed of transfer, which released NatWest as agent from any obligations, liabilities or responsibilities in respect of the facility. The financial performance of Yorkshire Food Group continued to decline, and by the time that administrative receivers had been appointed at the beginning of December 1997, Rabobank had incurred losses of around US$127 million.
The key aspect of Rabobank’s complaint related to the fact that between the period of March 1996 and October 1997, NatWest (through a separate lending office) made significant personal loans to various directors and former directors and managers of Yorkshire Food Group. It was alleged that these loans were used in dealings that, Rabobank later argued, should have been ‘the gateway to disclosure of a complex substructure of misconduct by the directors’ and that, accordingly, a failure by NatWest to disclose to Rabobank the existence of these loans or the fact that they were in default was pivotal, in that if NatWest had disclosed the information about the personal loans, Rabobank would not have advanced sums during the workout period or acquired NatWest’s debt, and consequently would not have suffered certain losses.
In a restructuring scenario, the court held that whether any representation has been made by a party (conceivably by an ad hoc committee or an individual member of it), and if it has, what its nature is, must be judged objectively according to whether the party agreed to disclose all relevant information; the impact that whatever is said may be expected to have on a reasonable representee in the position; and the known characteristics of the representee.
The key question for the court was whether Rabobank was entitled to infer from NatWest’s conduct that NatWest had agreed to disclose to Rabobank all facts material to the conduct of the workout. This inevitably required a detailed assessment by the court of the duties owed by NatWest and Rabobank as co-workout banks. To make this determination, the court relied heavily on the expert evidence presented by the parties on the practice of co-workout banks in the 1990s. The court favoured the expert put forward by NatWest (whose experience was more recent and relevant than that of the expert put forward by Rabobank) and found that there was no established practice of co-workout banks agreeing to disclose or actually disclosing to each other all material information, although it was good practice to disclose matters known to them that they honestly thought were material. In the absence of an express contractual obligation or a legitimate expectation of disclosure, there was no legal duty on banks to adhere to that practice or to exercise reasonable care to do so. In giving effect to such a practice, workout banks would typically make their own subjective assessment of what was important and disclose those facts that each considered to be material to the decisions of their fellow restructuring banks.
On the facts of the present case, the court held that the parties expected the restructuring to be a conventional one to be conducted in accordance with usual practice. As such, Rabobank, as a participant in the restructuring, should have been operating on the basis that most, but importantly not all, information known to NatWest that NatWest honestly considered would be significant to Rabobank would be disclosed. Importantly, there was, therefore, no justifiable reliance by Rabobank on an expectation of any wider disclosure beyond market practice. It is also submitted that with respect to an informal ad hoc committee with no express duties of disclosure operating on the basis of no duty of care and the exclusion of any fiduciary relationship, conventional market practice would dictate that there will similarly be no legitimate expectation of full disclosure or any duty of care or fiduciary relationship being extended from the ad hoc committee to the wider stakeholder constituency or to individual members of the committee inter se.
The court also held that in a restructuring scenario, a bank is not entitled to assume that silence means that no other material matters are known to other participants. The court, therefore, held that such silence could mean that NatWest had no knowledge of any material matters, or that NatWest did not consider such matters to be material or that NatWest was not adhering to what was generally regarded as normal practice among workout banks. The judge expressly stated that ‘[a]lthough the last eventuality might be morally objectionable, it could not of itself, without more, give rise to a duty to speak’.
This case is a helpful clarification of the current market position in that it confirms that there are no obvious duties between financial creditors and other participants, such as an ad hoc committee involved in a restructuring in the absence of express contractual obligations. Accordingly, the relevant institutions will vote or take other decisions based on their own subjective assessment of what is important. The case does, however, highlight the risks of deliberately withholding information that a financial creditor participating in a restructuring might expect to be disclosed as a market convention or indeed providing misleading information. The case is also a salutary reminder of the need for an ad hoc committee to constantly manage the risks relating to disclosure and the flow of information that may affect voting and decision making and their overall duties to other financial creditors. Constant disclaimers and exclusions of reliance are, therefore, sensible steps for ad hoc committees to take.
The relationship of the ad hoc committee members with each other
Substantial similarities with the relationship of the ad hoc committee and the stakeholder constituency
The law and practice regulating the relationship between individual committee members (as opposed to the stakeholder constituency) is not substantially different to that regulating the relationship of the committee with the stakeholder constituency. In particular:
- the relationship between the committee members on key issues will be governed by the finance documentation in the same way, so that as a general principle and without engaging the Redwood principles, being a member of an ad hoc committee will not affect the member’s ability to vote on waivers or amendments to key provisions in the finance documents;
- the risks of a fiduciary relationship to or with co-members will exist, but those risks are likely to be reduced by virtue of the fact that an ad hoc committee will work together collectively and be in receipt of the same information simultaneously. The fiduciary risk will also be mitigated by the fact that the committee members will agree among themselves (as a contractual matter) whenever they reduce their arrangements to writing in a cooperation or informal joint terms agreement that they can act in their own self-interest. This is, of course, different to the position with the broader stakeholder constituency, where there is no such contractual term agreed with them and the ad hoc committee;
- there will be no substantial limits on an individual ad hoc committee member with voting control and being able to bind other committee members, save where the exercise of the vote is oppressive or clearly discriminatory to the minority of the committee and constitutes an abuse of the power of the majority as it expropriates the economic value of the minority for a nominal consideration such that it is completely incapable of benefiting the minority. Conversely, there will be no risks for the committee members inter se if, as in Redwood, it can be legitimately argued that the resolution potentially benefits each member and is not being exercised for an improper purpose; and
- in the absence of an agreement to the contrary or in the case of fraud, it is unlikely that there will be any other duty of care from one member of the ad hoc committee to another, particularly in relation to disclosure and protecting the interests of other members. The limited scope for imposing such duties, as articulated in the case of Westminster Bank plc v. Rabobank Nederland, applies equally to relationships between members of the ad hoc committee.
Given that the premise of no inter-committee liability is founded in large part on there being no agreement to the contrary, it is of fundamental importance to analyse any relevant terms of appointment that may have been agreed in the restructuring market as between committee members. In the majority of cases, the terms of appointment are not made in writing and the ad hoc committee may simply exclude liability in all communications, verbal and written. In the minority of cases where an ad hoc committee has sought to regulate the relationships of the committee and its interaction and operation pursuant to agreed terms, it is clear from what has been discussed above that there are a number of complex issues that emerge between the members of an ad hoc committee that would generally benefit from a clear contractual regime to create operational certainty between the members of the committee.
The relationship as may be agreed in a cooperation or informal joint terms agreement
Given the delays that can occur in selecting and appointing the ad hoc committee and agreeing its terms and any remuneration, it will be necessary for the commencement of the ad hoc committee process to be retrospective following the execution of the appointment letter, from the date the process started, and for the letter to be construed accordingly.
The starting point for any ad hoc committee appointment letter is to define the role of an ad hoc committee as an informal body or working party that will liaise with relevant stakeholders, including the other committee members, circulate and disseminate information, and provide feedback and coordination. Such actions on the part of an ad hoc committee will always be at the absolute discretion of the members and will be framed (for the benefit of each member) as creating no obligations or responsibilities to either the issuer, the wider stakeholders and the individual members. In particular, there will be an express provision that the ad hoc committee will have no obligation to consult with any person, including other members and the company.
As between the members of the ad hoc committee, it may be necessary to vote on a number of issues, such as the appointment of advisers or the determination and resolution of a conflict of interest as between certain members. In designing a voting protocol as between members, there are a number of options, and one of the most common is a simple majority or qualified majority (of, say, two-thirds) of members by reference to their debt holdings. Alternatively, a simple numerical majority of members may prevail, or there can be a combination of a majority by debt holding, with a minimum number of members also supporting the resolution.
As among the members, they may agree on common counsel and a financial adviser, but they will negotiate substantial flexibility for themselves by providing that they can each seek their own independent professional advice from any advisers they may select.
In multi-layered capital structures (involving, by way of example, senior secured and unsecured notes with different tenors) where there is a possibility of a conflict with certain members of the committee having large holdings in different stratas of the capital structure, the ad hoc committee may seek to regulate such conflicts in advance. Where a conflicted member itself determines that it has a separate legal or commercial interest, or is identified as having such a conflicting interest by a majority of the other ad hoc committee members (in number or by holdings as may be agreed at the outset), it would be conventional for the conflict to be brought to the attention of the ad hoc committee members as a whole, via a notice that discloses that a conflict of interest has been identified, and if the conflict constitutes public information, the relevant conflict issue. Following the issuance of such notice, the ad hoc committee may vote by the same majority to isolate the conflicted party from information or professional advice relating to the relevant issue, or may take the step of excluding it from the ad hoc committee, such that it only receives information prepared for general distribution to the stakeholder constituency. The professional advisers may also be authorised by the ad hoc committee to cease acting for the conflicted member.
Requests for, and disclosure, of information
Typically, the terms will provide that the ad hoc committee members shall make any requests for information from the issuer via the committee’s appointed professional advisers. This will not prevent a member of the ad hoc committee requesting information (if any) that it is entitled to request under the relevant finance documents, but a well-advised ad hoc committee will provide that any member making such a request will forward to the professional advisers both its written request to the issuer and the information delivered to it pursuant to that request, in each case without distributing that information or that request to the other ad hoc committee members. The appointment letter will also provide that any information must initially be provided to the professional advisers to avoid the ad hoc committee members inadvertently receiving price-sensitive information that could inhibit their ability to trade their holdings or acquire more holdings in the market. To supplement this, members will also agree among themselves not to circulate information they hold directly to other members, but will only do so via the professional advisers. To avoid being adversely affected by unwanted disclosure by the issuer, the ad hoc committee will typically support each other in requiring (as a contractual matter) that the issuer has appropriate policies and procedures to avoid any ad hoc committee member receiving private information.
As regards the cleansing of private information previously provided to the ad hoc committee with its consent and in conformity with the processes established under a confidentiality undertaking, the appointment letter may well provide that one or more ad hoc committee member is entitled to furnish the issuer with a cleansing notice, which will oblige the issuer within a short period thereafter (usually two days) to publicly disclose all private information that it is required to, or that is necessary to enable the ad hoc committee members to carry out any sale or purchase of securities, in each case, in accordance with any applicable laws or regulations or principles of conduct of any relevant jurisdiction. Typically, the issue of such a notice will trigger a consultation process with the issuer and its legal counsel on the form and content of the cleansing announcement to be made. To protect the members of the ad hoc committee it is usual for the letter to provide that if the issuer does not comply with the request or fails to agree to a form of cleansing announcement within the designated timeline, a relevant ad hoc committee member may, at its discretion, make public its own cleansing announcement.
Handling of private information
The ad hoc committee typically agrees that it will instruct the professional advisers to consult from time to time with all of the ad hoc committee members simultaneously, as far as is reasonably practicable, and request that each ad hoc committee member promptly confirms whether it agrees to receive private information; if it does, the effect is that it ceases to be a ‘public’ committee member until he or she no longer holds any relevant private information. To prevent other members of the committee becoming inadvertently restricted from trading, it is normal for the letter to provide that each ad hoc committee member who agrees to become restricted shall notify the other members of the ad hoc committee and the professional advisers of this.
Ability to act in own self-interest
To minimise the potential risk for the ad hoc committee, each member will typically acknowledge and agree that members may provide debt financing, equity capital or financing, investment, advisory or other services to other persons with whom the issuer group may have conflicting interests. Equally, members will be asked to agree that they each may act in more than one capacity in relation to the restructuring and have conflicting interests in respect of these different capacities. Moreover, each member, subject to any applicable restrictions on disclosure under applicable laws and regulations and any contrary provisions regulating disclosure in the appointment letter, will typically seek permission to communicate with and enter into any discussions in relation to the issuer group and negotiations or agreements with any other person, including any creditor or shareholder of the issuer group as such member deems fit in its sole discretion.
Perhaps most importantly, the ad hoc committee’s members will agree that they will at all times remain free to act in what they each perceive to be their own interests as stakeholders or in any other capacity (as applicable), and shall have no obligation to agree, or recommend or support the restructuring, or any other proposal that the committee or the issuer may wish to put to all or any of the group’s creditors.
 Christopher J Howard is a partner at Sullivan & Cromwell LLP.
 363 B.R. 701 (Bankr. S.D.N.Y. 2007).
 Northwest Airlines II, 363 B.R. 704, 708 (Bankr. S.D.N.Y. 2007).
 ibid at 709.
 ‘Should ad hoc committees have Fiduciary Duties? Judicial Regulation of the Bankruptcy Market’, David L Perechocky, New York University School of Law Winter 2012 at p. 8.
 419 B.R. 271, 273 (Bankr. D.Del. 2009).
 ibid. at, 279 (Bankr. D.Del. 2009).
 ‘Should ad hoc committees have Fiduciary Duties? Judicial Regulation of the Bankruptcy Market’, David L Perechocky, New York University School of Law Winter 2012 at p. 10.
 Boardman v. Phipps  2 AC 46.
 Baker v. Gibbons  2 All ER 759.
  1 AC 268.
  Q.B. 713.
  All ER (D) 701.
  EWCA Civ 811.
  All ER (D) 65.
  EWHC 1605 (Comm).
 See Premier Waste Management Ltd v. Towers  EWCA Civ 923,  1 BCLC 67.
 Underhill and Hayton: Law of Trusts and Trustees. Chapter 13 – ‘The Trustee’s Duties’. See also Aberdeen Rly Co v. Blaikie Bros (1854) 1 Macq 461 at 471, HL, per Lord Cranworth LC; Broughton v. Broughton (1855) 5 De GM & G 160; Bray v. Ford  AC 44 at 51, HL, per Lord Herschell and Cook v. Deeks  1 AC 554.
  AC 369.
  Ch 286,  2 All ER 1120.
 See  Ch 286 at 291,  2 All ER 1120 at 1126.
  EWHC 2703 (Ch),  1 BCLC 149.
 At para. 105.
 Assénagon Asset Management S.A. v. Irish Bank Resolution Corporation Limited (Formerly Anglo Irish Bank Corporation Limited)  EWHC 2090 (Ch).
 Assénagon Asset Management S.A. v. Irish Bank Resolution Corporation Limited (Formerly Anglo Irish Bank Corporation Limited)  EWHC 2090 (Ch). at para. 46.
 Briggs J in Assénagon at paras. 84–86.
  4 All ER 907 (at ). See also Horkulak v. Cantor Fitzgerald International  EWCA Civ 1287,  IRLR 942,  ICR 402; Socimer International Bank Ltd (in liq) v. Standard Bank London Ltd  EWCA Civ 116,  1 Lloyd’s Rep 558 (at –); JML Direct Ltd v. Freesat UK Ltd  EWCA Civ 34,  All ER (D) 21 (Feb); and Braganza v. BP Shipping Ltd  UKSC 17,  4 All ER 639,  ICR 449. The rule that a power may only be exercised for the purpose for which it was conferred was reiterated by Rimer J in Redwood.
 See Ludgate Insurance Co Ltd v. Citibank NA  Lloyd’s Rep IR 221 (per Brooke LJ at 239–240); Equitable Life Assurance Society v. Hyman  3 All ER 961 at 971, 972,  1 AC 408 at 459, 461 (per Lord Steyn and Lord Cooke of Thorndon).
 The interrelationship between members of the ad hoc committee as between themselves is analysed in the second part of this chapter.
  EWHC 1056 (Comm).
  2 All ER 833 – see, generally, paras. 110–114 of the judgment.
  EWHC 1056 (Comm).
 It is not uncommon for an appointment of an ad hoc committee to take up to 12 weeks or more in cases where the company has not accepted the realities of its position and the need to indemnify members or provide information or some of the other constituents in the class are posturing for their own appointment.
 For more on public and private information, see Chapter 11 on the insider/outsider conundrum.