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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> WestLB Ag v Nomura Bank International Plc & Anor [2010] EWHC 2863 (Comm) (11 November 2010) URL: https://www.bailii.org/ew/cases/EWHC/Comm/2010/2863.html Cite as: [2010] EWHC 2863 (Comm) |
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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WestLB AG |
Claimant |
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- and - |
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Defendants |
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Richard Handyside QC and Edward Levey (instructed by Ashurst LLP) for the Defendants
Hearing dates: 11-14 and 18-19 October 2010
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Crown Copyright ©
Mr. Justice Teare :
i) The Second Defendant and First Gulf entered into a share purchase agreement dated 30 September 2003 ("the Share Purchase Agreement") pursuant to which the Second Defendant acquired the Shares on behalf of the First Defendant. The Share Purchase Agreement provided (by clause 4.2) for a forward sale of the Shares by the Second Defendant back to First Gulf on the Maturity Date of the CD issued by the Claimant as described below ("the Forward Sale").
ii) The First Defendant as Issuer issued the Series 4 Step-Down Notes ("the Series 4 Notes") to the Second Defendant in an aggregate nominal amount of US$26 million. The Second Defendant transferred the Series 4 Notes to the Claimant. In consideration of the Series 4 Notes, the Claimant issued Variable Redemption Portfolio Linked Certificates of Deposit ("the WestLB CD") in the principal amount of US$26 million to the Second Defendant.
iii) The Second Defendant transferred the WestLB CD to First Gulf pursuant to the Share Purchase Agreement in consideration for the Shares.
iv) Under the terms of the WestLB CD, the Reference Portfolio was initially the Series 4 Notes. However, the terms provided for an option (the "Holder Contingent Portfolio Option") whereby the holder could opt to substitute the Series 5 Variable Redemption Notes (i.e. the Notes) for the Series 4 Notes as the Reference Portfolio. That option was exercised on 10 October 2003 and the Notes were accordingly issued by the First Defendant to the Claimant in exchange for the Series 4 Notes.
v) The terms of the Notes are set out in a Pricing Supplement dated 3 October 2003 ("the Pricing Supplement") issued in conjunction with an Offering Circular dated 26 July 2002.
vi) The result of the above transactions was that:
a) the Second Defendant held the Shares (on behalf of the First Defendant);
b) the Claimant held the Notes; and
c) First Gulf (or any subsequent transferee) held the WestLB CD.
i) The terms of the WestLB CD provided that upon maturity the holders of the certificates were entitled to delivery of the Notes. The maturity date of the WestLB CD occurred before the maturity date of the Notes.
ii) Upon maturity of the Notes the First Defendant could either make physical delivery of the Shares or pay an amount which represented their value.
"1. Redemption Amount
Subject to Special Condition 3 (Issuer's Physical Delivery Option), [t]he Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the 'Pro Rata Share') of the NAV of the Reference Fund minus the Funding (the 'Redemption Amount'), as determined by the Calculation Agent in its sole and absolute discretion.
2. Determinations in respect of the Reference Fund
The determination of the NAV of the Reference Fund by the Calculation Agent shall (in the absence of manifest error or fraud) be final and binding upon all parties. A certificate of the Calculation Agent as to the NAV of the Reference Fund shall be conclusive and binding as between the Issuer and the bearer hereof.
If the Calculation Agent fails at any time for any reason to establish the NAV of the Reference Fund or to make any other determination or calculation required pursuant to these Conditions, the Issuer shall do so and such determination or calculation shall be deemed to have been made by the Calculation Agent. In doing so, the Issuer shall apply the provisions of these Special Conditions, with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and, in all other respects, it shall do so in such manner as it shall deem fair and reasonable in all the circumstances.
None of the Issuer or the Calculation Agent shall have any liability to the Noteholder, and the Noteholder shall not have any recourse to the Issuer or the Calculation Agent, in respect or on the basis of the performance in respect of the Reference Fund, or any assets or instruments to which the Reference Fund is linked, or [...] any determination of the NAV of the Reference Fund.
3. Issuer's Physical Delivery Option
Physical Delivery Option: If at any time a Redemption Amount becomes payable to the Noteholder, the Issuer shall have the option (the "Issuer's Physical Delivery Option"), instead of paying such amount, to deliver to the Noteholder on the Maturity Date a Pro Rata Share of either (i) the underlying assets representing the Reference Fund; or such lesser amount of underlying assets representing the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled, or (ii) the shares of the Reference Fund; or such lesser amount of the shares of the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled (the "Deliverable Property").
Exercise of Issuer's Physical Delivery Option. In order to exercise the Issuer's Physical Delivery Option the Issuer will notify the Noteholder at least [15] Business Days prior to the Maturity Date by delivery of a "Physical Settlement Notice". The Physical Settlement Notice will specify (i) the Physical Settlement Date; (ii) the Deliverable Property; (iii) the manner in which legal and beneficial title to the Deliverable Property will be transferred to or to the order of the Noteholder and any information required to be provided to the Issuer by the Noteholder necessary to effect such transfer. Within the period commencing on and including the date of delivery of the Physical Settlement Notice and ending on and including the date which falls 5 Business Days thereafter, the Noteholder shall give to the Issuer (i) details of the information required to be provided by it as specified in the Physical Settlement Notice; (ii) all necessary consents and/or authorisations (if any) that the Issuer may request; and (iii) all other relevant information or details reasonably requested by the Issuer in connection with delivery of the Deliverable Property (the "Physical Settlement Details")…".
The "NAV of the Reference Fund" was defined as meaning:
"an amount equal to the value of the assets in the Reference Fund net of all and any expenses, costs, taxes, deductions, imposts and/or duties, including but not limited to the Unwind Amount, in each case, determined by the Calculation Agent, based on such assumptions and information, including but not limited to prices, derived from such sources as the Calculation Agent deems appropriate in its sole and absolute discretion."
"Calculation Agent" was defined as meaning:
"Nomura
International plc. The determination by the Calculation Agent of any amount or of any state of affairs, circumstance, event or other matter, or the formation of any opinion or the exercise of any discretion required or permitted to be determined, formed or exercised by the Calculation Agent pursuant to the Notes shall (in the absence of manifest error) be final and binding on the Bank and the Noteholders.
In performing its duties pursuant to the Notes, the Calculation Agent shall act in its sole and absolute discretion.
Any delay, deferral or forbearance by the Calculation Agent in the performance or exercise of any of its obligations or its discretion pursuant to the Notes including, without limitation, the giving of any notice by it to any person, shall not affect the validity or binding nature of any later performance or exercise of such obligation or discretion, and the Calculation Agent shall bear no liability in respect of, or consequent upon, any such delay, deferral or forbearance."
"Maturity Date" was defined as meaning
"if the CD Holder Contingent Portfolio Option is not exercised under the Reference CDs: (a) 25 Business Days after the Expiry Date of the Contingent Portfolio Option in the Reference CDs; or otherwise (b) the earlier of (i) the Scheduled Maturity Date; (ii) 20 Business Days after the Maturity Date of the Reference CDs; and (iii) the Early Redemption Date".
"Reference Fund" was defined as meaning
"a portfolio of 195,000 participating redeemable preference shares of a nominal value of US$100[1] each in the capital of the sub-fund designated the Global Opportunities Fund managed by Chinkara Global Funds Limited PCC".
The facts
"As you know, the USD 26m NBI 08 with ISIN XS0177751541 is due on 4 Nov 08.
The Redemption Amount would equal (i) the NAV of 195,000 shares in Global Opps sub-fund minus (ii) any loss incurred by NBI in selling the shares minus (iii) the funding charge of USD 1,722,135 (note that out of this, NBI would then need to pay 765,393 to First Gulf).
Assuming NBI can sell shares at their current NAV of 123.23, then the Redemption Amount would be USD 22.31m (i.e. 195,000 x 123.23 minus 1,722,135). If NBI cannot sell the shares at their current NAV then the Redemption Amount would be materially lower.
NBI shall have the option to pay the Redemption Amount in one of 3 ways:
1. Payment of USD 22.31m in cash - this assumes that NBI has pre-sold all of the Global Opps shares at their implied NAV of USD 24,029,850.
2. Delivery of 181,025 shares in Global Opps (i.e. shares with a NAV of USD 22.31m) - this assumes that NBI has pre-sold 13,975 shares at their implied NAV of USD 1,722,135. As explained above, if NBI cannot pre-sell at that price then NBI would deliver a much lower amount of shares in order to ensure that NBI retained enough shares to cover the funding charge of USD 1,722,135.
3. Delivery of the correct amount of underlying assets in the Global Opps fund - which I assume is not an option.
In order to effect any of the share sales and/or deliveries under options 1 or 2, then I understand that various transfer forms, and sign-offs from the Fund directors are required - given that we now have only 3 good business days between today and Nov 4th (i.e. Thursday, Friday and Monday) then we need to begin this process ASAP. This means we need to agree today who will buy the shares from NBI and at what price.
Please Advise."
"………The Issuer [the First Defendant] hereby exercises its Physical Delivery Option in accordance with the terms of the Notes
……………
The Physical Settlement Date for the purposes of the Notes will be Tuesday 11 November 2008,or such later date by which the transfer of the Deliverable Property to the Noteholders has been approved by the fund manager and the MITCO of the Reference Fund.
Accordingly, on the Physical Settlement Date the Issuer shall cause to be delivered pro-rata to the Noteholders 6,962 shares in the Reference Fund per USD 1,000,000 Specified Denomination of the Notes, which equates to a Redemption Amount for all of the Notes of an amount equal to USD 22,307,715 calculated in accordance with the terms of the Notes."
"The amount of shares delivered to the Noteholders in relation to the maturity of the NBI Notes was calculated by the Calculation Agent at the time and using its discretion as it is entitled to under the Pricing Supplement. The amount of shares delivered was calculated as the total number of shares in the Reference Fund minus the number of shares which we calculated had an equivalent value to the USD amount of the Funding. Such value was calculated as the lower of any bid received for such amount of shares and the most recent NAV of the shares provided by the MITCO.
As previously explained, we are not a market-maker in the shares and nor have we nor do we make any representation as to the market or realisation value of the shares being delivered. In addition, as stated in the terms of the Notes, neither the Issuer nor the Calculation Agent has any liability in relation to the shares delivered pursuant to the Notes.
For further information regarding the NAV of the fund, including the prospectus or any details of the Reference Fund, please liaise directly with the MITCO (Mauritius International Trust Co) - whose contact details are below".
"(i) We have explained to you the process of how we determined the Deliverable Property (in e-mail below of today) and have confirmed the USD amount of the Funding (in e-mail below of 12 Jan), and so the detail you are now asking is how did we determine how many shares to equate to the Funding deduction, and in particular for details of either the NAV of the Reference Fund and/or any bid we received. In terms of the NAV of the fund, the fund is a private fund and as such the NAV provided to share holders of the fund (in this case,Nomura
) is confidential. We are of course willing to provide assistance as we value the relationship between our institutions, however you will appreciate that the requested information is confidential. We are happy for you to approach the MITCO directly, copying ourselves, to request the relevant information (details in previous e-mail) and we will assist where possible to obtain the information you have requested. In terms of details of any bid, for this deal we were able to secure a bid for enough shares to cover the funding at a price per share of USD 123.23 - however the bidder has asked to remain confidential."
"2. Selling USD 2m worth of Fund units by 2 March (to cover fees on a trade maturing on 26 March) - we need to notify noteholders by 2 March in terms of how many units we will be delivering - noteholder entitlement is determined byNomura
in its sole discretion as the total amount of underlying units less the number of units that we determine equates to the fees - we will look to pre-settle a 2m sale of units with the client, failing which we will calculate the noteholder entitlement either (i) as low as is legally possible or (ii) at zero, together with a commitment to deliver any excess units once we have covered the fees. TL is considering both options, but option (i) is more likely as option (ii) would probably require a change to the terms of the notes. Option (i) will require us to demonstrate we have used reasonable efforts to sell units.
3. Covering fees on all remaining trades (which mature between 2013 - 2018) - total exposure of USD 80m (gross fees of USD 94m with reserves of USD 14m) - in order to cover these fees, we will need to sell enough of the underlying units before the relevantNomura
note redeems - the total current NAV of the units held is USD 700m - however, the units are illiquid and so we will look at ways of ensuring we can redeem/liquidate the units in exchange for the underlying assets - in addition, we will look to restructure the notes to allow option (ii) above, with option (i) as the fall-back position. In addition, we will push hard to engage with the custodian (Standard Chartered) in terms of verifying the NAVs of the underlying assets (which have historically been sent to us by the MITCO)."
"Whilst Redacted investor has challenged the physical settlement, if they do then we will have to cash settle - and our cash settlement amount is likely to be quite low, due to the illiquidity of the shares, meaning that we should be prepared for some noise on our calculation - particularly, as (i) the end investor is aware through the physical settlement discussions that we have received a bid for some of the shares and may expect us to use that level for all of the shares (although the end investor also knows that the bid was only in respect of around 6% of the deal and that the shares are highly illiquid) and (ii) the cash settlement amount needs to be valid as of 30 Sep 08 (although market conditions on 30 Sep 08 were not materially better than they are now and in any case these shares are illiquid in most markets).
The nominal value Redacted -- is USD 26m and the end investor is WestLB London Redacted Redacted West LB will be particularly keen to challenge our cash settlement calculation, as it transpires that they have mistakenly cash settled at par their repack of theNomura
note, whereas they should have settled by physically delivering the
Nomura
note - and so WestLB have been left holding the
Nomura
note and are looking at all angles to recover it (although their main option is to get their cash back from the end investor in exchange for passing on the redemption proceeds for the
Nomura
note).
Ultimately, however, whilst there may be noise, the risk of dispute is mitigated by the terms of the notes, which provide that the Calc Agent's determination shall "be in its sole and absolute discretion" and that such determination "shall (in the absence of manifest error or fraud) be final and binding on all parties". Of course, we must be reasonable in our valuation of the shares - and we would be - but the wording is clearly helpful.
I have attached the deal docs Redacted the terms of theNomura
note are set out in Appendix 2 Redacted
TL is fully involved in all this and I'll keep you updated. In the meantime, our main focus should be to establish a cash settlement amount - lets discuss that in the morning".
"If the portfolio information is available then the brokers should give you info after they have done their work. Otherwise, they should be able to tell you within the hour (if not sooner) that they would bid only zero for this."
Issues of construction
"Subject to Special Condition 3 (Issuer's Physical Delivery Option), [t]he Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the 'Pro Rata Share') of the NAV of the Reference Fund minus the Funding (the 'Redemption Amount'), as determined by the Calculation Agent in its sole and absolute discretion."
i) It would be rational to expect the determination of each component of the redemption amount to be made at the same time. Conversely, it is difficult to suggest a rational reason for determining the percentage which the principal amount represents of the aggregate principal amount 20 business days before the maturity date whilst determining the NAV of the Reference Fund on a different date.
ii) The option to give physical delivery pursuant to Special Condition 3 must be exercised 15 business days before the maturity date. Since that option requires knowledge of the redemption amount it makes sense that that is determined 20 business days before the maturity date.
The Claimant's first case
The Claimant's Second Case
i) The Second Defendant asked Mr. Marshall to value the NAV of the Reference when he had no relevant experience of valuing assets such as the Reference Fund.
ii) Having regard to the illiquid nature of the asset a dealer poll was not an appropriate method of valuation. Nil bids were to be expected.
iii) The Second Defendant had regard to the circumstance that the valuation was needed for a cash settlement when this was an irrelevant consideration.
iv) The Second Defendant failed to have proper regard to other evidence of value both before embarking on the dealer poll and in concluding from the absence of bids that the asset should be valued at zero.
i) Although it was common ground between the expert witnesses that a dealer poll is a commonly used method to value illiquid securities it was also common ground that there was no secondary market for the shares represented by the Notes. This was because there was little information as to the assets represented by the Shares. In those circumstances it was unlikely that a dealer poll would produce any bids. Indeed, the experts called by both parties agreed that it was unlikely that a dealer poll would have produced any bids. If a dealer declines to bid because he has no information about the asset for which he is asked to bid there must be a doubt as to whether his refusal to bid is evidence that the asset has no value. It may have a value but the dealer did not know what that value was and therefore did not bid.
ii) Although the Shares were, in principle and subject to the terms of the governing documents, redeemable by MITCO and the declared NAV per share was some evidence of value, the reliability of that declared value depended upon whether in fact MITCO was willing and able to redeem at that price in cash in the prevailing market conditions. There was a risk that the conditions might have caused it to exercise its right to suspend redemptions in cash. The valuer would therefore have to make additional enquiries.
The value of the Shares represented by the Notes as at 30 September 2008
Conclusion
Note 1 It is common ground that the nominal value of each of the Shares was in fact US$1.00. [Back]