UK: England and Wales: restructuring, exit consent and the limits of majority power

Mr Justice Briggs, sitting in the High Court, gave judgment last Friday in Assenagon Asset Management SA v Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch). His decision is important and potentially far reaching. It is the first English law authority to consider the operation of a so-called exit consent mechanism in debt restructuring. Broadly put, the purpose of an exit consent mechanism is to deal with creditor holdout where an issuer proposes to restructure its existing debt. Existing bondholders may, for example, be invited to accept replacement bonds whilst also voting to amend the terms of the existing bonds in a way that reduces (or destroys) their value. Pressure is thereby put on minority bondholders to accept the issuer's offer not least because it is difficult for them to know how other bondholders will vote.

Whilst courts in other jurisdictions have considered the use of exit consent techniques in relation to purported duties of good faith owed by the issuer to the bondholders (see, e.g., Katz v Oak Industries Inc. (1986) 508 A.2d 873 in Delaware), what makes the current case of interest is that argument centred on the power of the majority bondholders to bind the minority. Mr Justice Briggs held that this power was not unlimited, referring to English authorities where limitations have been recognised on the power of a majority to bind a minority within a class. He accepted that it was not lawful for a majority bondholder to use its voting power to "lend its aid" to the coercion of a minority by voting for a resolution under which the minority's rights were expropriated for nominal consideration and, with regard to the the coercive use of exit consent techniques, he stated (at paras. [84] - [86]):

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. This form of coercion is in my judgment entirely at variance with the purposes for which majorities in a class are given power to bind minorities, and it is no answer for them to say that it is the issuer which has required or invited them to do so. True it is that, at the moment when any individual member of the class is required (by the imposition of the pre-meeting deadline) to make up his mind, there is at that point in time no defined minority against which the exit consent is aimed. But it is inevitable that there will be a defined (if any) minority by the time when the exit consent is implemented by being voted upon, and its only purpose is to prey upon the apprehension of each member of the class (aggravated by his relative inability to find out the views of his fellow class members in advance) that he will, if he decides to vote against, be part of that expropriated minority if the scheme goes ahead. 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".

Update (3 August 2012): the ICLR has published a summary of the judgment here.