Euro crisis: focus on non-sovereign investments ABA International - - PowerPoint PPT Presentation

Euro crisis: focus on non-sovereign investments

Reid Feldman Kramer Levin Naftalis & Frankel LLP

47, avenue Hoche 75008 Paris, France telephone: + (33) 1 44 09 46 03 fax: + (33) 1 44 09 46 01 rfeldman@kramerlevin.com

ABA International Business Law Committee

Chicago, Illinois August 3, 2012

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Topics covered

Possible outcomes – and the likelihood of a

legally coherent solution in case of exit

EU legislation and other applicable rules –

how they can be used to achieve that result

Practical legal issues for contracts with private counterparties – risks to evaluate and

questions to ask

Note: This outline is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Legal advice should be sought in assessing the impact of any of the matters mentioned herein.

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Possible outcomes

Recent developments

ECB “will do whatever it takes to preserve the euro”. (Mario Draghi, July 26, 2012) ECB statement, August 2, 2012:

“Risk premia [in government bond prices in several euro area countries] that are related to fears of the

reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.”

“In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area

need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination”

“There is no going back to the Lira or the Drachma or to any other currency. It is pointless to bet against the

• euro. It is pointless to go short on the euro. . . . It is pointless because the euro will stay and it is irreversible.”

Preparations for exit from the euro – example: “The parent company of Spanish carrier Iberia and British

Airways said it has made contingency plans for Spain’s possible exit from the single European currency, the most high-profile acknowledgment yet by a European blue-chip company of the dangers of a euro-zone collapse.” (WSJ, 4 August 2012)

“Accepting more inflation at home is . . . a way for the [northern euro-zone countries] to restore debt sustainability in the [southern euro-zone countries].” (Bruegel, July 2012) Priorities: bring down sovereign borrowing costs; make laggard economies “more competitive” (including

employment and retirement issues); promote growth (or initially, a softer recession); institutional and related reforms; resolution of the Greek situation; price stability; maintaining adherence to certain principles (perhaps the least important in this context).

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Possible outcomes

Exit from the euro

national legislation, probably to include: redenomination of debts into new currency; bank

holiday; capital and exchange controls; prohibition of payment in euro of redenominated debts

possible EU legislation favoring a legally coherent exit restrictions on movement of capital and payments are permitted to protect public policy or

public security (if non-discriminatory and proportionate)

such legislation will likely impact private contractual obligations

Break-up

stakes: the acquis communautaire; dislocations, dysfunction, defaults issues to resolve: what of the acquis communautaire to preserve; settling accounts; favoring a

legally coherent break-up (perhaps in a very difficult economic/political environment)

Harmonization/federalization

issues to resolve: taxation, employment law, institutional reform, geopolitical considerations,

etc.

more harmonization of legal rules risk of protective national law being overridden by EU law

This paper focuses on the impact of these measures on private investments, and not issues involving sovereign debt and recourse against sovereign states (e.g., under investment treaties).

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EU legislation and other applicable rules

Applicable rules

Law applicable to contractual obligations: Regulation 593/2008 ( “Rome I Regulation” or “RI”)

choice of applicable law generally upheld regulation not applicable to certain contracts, including negotiable instruments, company law, family-related obligations,

trusts and arbitration agreements

special rules for transport, consumer, insurance and employment contracts for contracts concluded prior to December 17, 2009, choice of law determined by Rome Convention (“RC”) conflicts rules of chosen law may subject specific issues to other bodies of law, e.g. lex monetae and capacity

Choice of forum and recognition/enforcement of judgments

Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the

“Brussels I Regulation” or “BI”), applicable to disputes where the defendant is resident in an EU member state other than Denmark

Lugano Convention of 2007 as amended (“Lugano II”), applicable in EU member states plus Iceland, Norway and

Switzerland

Insolvency proceedings: Regulation 1346/2000

principal proceedings to be organized in jurisdiction with “center of main interests”, whose law is applicable to “the effects

• f the insolvency proceedings on current contracts to which the debtor is party”, with exceptions including real estate,

employment and “payment systems or markets”

secondary proceedings allowed in other jurisdictions, limited essentially to disposition of assets therein via winding-up

proceedings

does not apply to proceeding concerning insurers, credit institutions, custodians or collective investments undertakings

(but see Directives 2000/17 and 2001/24)

IMF (Bretton Woods) Agreement article VIII 2(b) – deals with restrictions on current payments European Convention on Human Rights (“ECHR”)

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EU legislation and other applicable rules

Applicable rules – summary of relevant provisions

Parties’ choice of applicable law (including future changes in that law) and choice of forum will be upheld (RI §3(1), RC §3(1)) Forum court may apply:

• ther laws by renvoi, including lex monetae (law governing the currency of the contract), if so provided by applicable law
• mandatory provisions of the law of a country where “all other elements relevant to the situation” (other than choice of law) are located (RI

§3(3), cf. RC §3(3) & 7(1))

• mandatory provisions of EU law when all such other elements are located in the EU (RI §3(4))
• “overriding mandatory provisions” of the forum state (RI §9(2), RC §7(2))
• “overriding mandatory provisions” of the country of performance, “insofar as” such provisions render performance illegal and the forum

deems their application appropriate (RI §9(3), cf. RC § 7(1) & 10(2))

Forum court may refuse application of chosen law or enforcement of foreign judgment if manifestly incompatible with the public policy (ordre public) of the forum (RI §21, RC §16, BI §34(1), BC §27(1)) ECHR protocol on “Protection of property” guarantees “peaceful enjoyment of . . . possessions” subject expropriation with compensation and to protection of “the general interest” Judgments of courts in EU member states plus Iceland, Norway and Switzerland will be generally be recognized and enforced in all those countries IMF (Bretton Woods) Agreement article VIII 2(b)

• makes unenforceable “exchange contracts which involve the currency of any member and which are contrary to the exchange control

regulations of that member maintained or imposed consistently with this Agreement”

• allows member states to “cooperate in measures for the purpose of making the exchange control regulations of either member more

effective, provided that such measures and regulations are consistent with this Agreement”

Insolvency proceedings and judgments recognized throughout the EU unless

• “manifestly contrary “ to public policy Reg. 1346/2000 §26
• limit “personal freedom and postal secrecy” – Reg. 1346/2000 §25(3)

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EU legislation and other applicable rules

Applicable rules – impact: choice of law and forum does not prevent application of other legal rules

Choice of applicable law

• if choice is the law of an exiting member state (where the debtor or guarantor is located): changes in that law, including redenomination,

will be recognized in other member states subject to any “overriding mandatory provision” of forum’s law and EU law (if all relevant elements are located in the EU)

• if applicable law is not the law of an exiting state: choice should be upheld subject to law of exiting state (if all relevant elements are

located there) and EU law (if all relevant elements are located in the EU) and any “overriding mandatory provision” of forum’s law

Choice of forum

• if forum is in the exiting member state: measures such as redenomination will be applied regardless of choice of applicable law, if such

measures are “overriding mandatory provisions”

• if forum is in another member state: measures such as redenomination will be applied if
• exiting state’s law is chosen unless forum state law contains “overriding mandatory provisions”
• another law is chosen but all relevant elements are in exiting state
• law of exiting state is lex monetae
• EU legislation so provides
• if forum is a non-member state: look to its rules as to comity (or equivalent) and any relevant treaties
• if forum is any IMF member state:
• “exchange contracts” may be unenforceable
• measures may be adopted supporting exiting country’s exchange controls

Enforcement of judgments

• judgments will be enforced unless “manifestly contrary to public policy” in the state of enforcement; default judgment if defendant not

served and given opportunity to defend; or res judicata in exiting state: pro-creditor judgments will probably not be enforced

• in other EU states: will pro-creditor judgments be handed down and enforced?
• in non-EU states?

IMF Agreement VIII (2)(b) makes “exchange contracts” unenforceable and can be used as a basis of new measures supporting euro exit Insolvency proceedings may have the last word

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EU legislation and other applicable rules

Applicable rules – conflicts rules of the chosen law may subject specific issues to other bodies of law

lex monetae

Issue is whether the parties intended that the currency of account be the currency of a

particular country, in which case a change of currency by that country from the euro to a new currency would be deemed binding on the parties.

Review of cases in England, France and elsewhere suggests that:

The result may not be crystal clear, even if currency is referred to in the contract.

capacity

Haugesund Kommune & Anor v Depfa ACS Bank & Anor [2010] EWCA Civ 579) – swap

contracts subject to English law were void because counterparty Norwegian municipalities lacked capacity under Norwegian law to enter into those contracts, notwithstanding that under Norwegian law the contracts might be upheld on grounds of good-faith reliance by the other counterparty.

This issue can produce a surprising result.

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EU legislation and other applicable rules

Applicable rules – operation of Regulation 44/2001 re automatic enforcement of judgments and conservatory measures

Banco Nacional de Commercio Exterior SNC v. Empresa de Telecommunicaciones de Cuba SA [2007] APP.L.R. 10/11

• Banco Nacional de Commercio Exterior (Bancomext) made two loans (US$350 million and US$211 million) to Banco Nacional de Cuba

(BANCUBA), Empresa de Telecommunicaciones de Cuba (ETECSA) and its parent Telefonica Antillana (TEFLAN), with disputes subject to ICC arbitration (in Paris under the First Loan Agreement and in Madrid under the Second Loan Agreement).

• Both loan agreements were secured by an assignment of payments from international telecommunications operators deposited with Banca

Intesa under an Escrow Agreement governed by Italian law with exclusive jurisdiction to Turin court. Cuban decree purported to make the assignment and escrow illegal and unenforceable (and substituted a guarantee of the Cuban state).

• Bancomext brought proceedings in Turin under the Escrow Agreement.
• ETECSA and TEFLAN brought arbitration proceedings in Paris under the Loan Agreement, whereupon the Turin court suspended the Turin

proceedings.

• Paris arbitration award held that the Cuban decree did not constitute force majeure excusing performance under the Loan Agreement and
• rdered deposit of funds in the relevant escrow account.
• Turin court rendered judgment against ETECSA for US$160 million; that judgment was appealed and enforcement thereof was initially

suspended but the suspension was set aside by Turin Court of Appeals.

• On application by Bancomext an English court registered the Turin judgment and granted domestic and international freezing orders.
• The Paris arbitration award was annulled by the Paris Court of Appeal (because it decided matters subject to the Second Loan Agreement,

under which arbitration was to take place in Madrid).

• Turin Court of Appeals rejected further request for suspension of enforcement of Turin judgment (since if appeal thereof was succession

ETECSA could recover amount paid to Bancomext, which undertook to repay any amount due).

• English Court of Appeal rescinded worldwide freezing order but maintained domestic order (with undertaking by Bancomext regarding

payment of any damages resulting from freezing order).

• English Court of Appeal rejected the argument that enforcement of the Turin judgment was contrary to UK public policy (right to peaceful

enjoyment of property under ECHR), declining to consider the possible impact of the proceedings in Paris as an impermissible review of the substance of the Turin judgment but noting the findings of the Turin court (among others) that the Escrow Agreement was independent from the Loan Agreement.

Sovereigns can be determined adversaries; contractual complexity can be exploited; in this case the creditor prevailed.

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EU legislation and other applicable rules

Applicable rules – insolvency

ECJ cases

• Eurofood IFSC Ltd, ECJ C-341/04 2 May 2006 – COMI situated in the country of the registered office (Ireland) where company conducted

some activities, notwithstanding that economic choices were controlled by parent company in Italy; factors allowing COMI to be outside country of registered office must be objective and ascertainable by third parties

• Interedil, ECJ C-369/09 20 October 2011 – CMI is determined by EU law, not national law; presumption that COMI is in place of registered
• ffice cannot be rebutted when management and supervision take place in that country
• Rastelli Davide e C. Snc v Jean-Charles Hidoux, ECJ 15 December 2011, n° C-191/10 – principal proceedings in France, attempt to join

Italian affiliate refused since intermingled assets not a sufficient basis to establish COMI; COMI must be identified by reference to criteria that are both objective and ascertainable by third parties

English cases

• Brac Rent-A-Car International, Re [2003] EWHC (Ch) 128 – COMI in the UK, where almost all operations are conducted, although debtor

incorporated in Delaware Re

• Daiseytek-ISA Ltd and others (16 May 2003) – COMI of German and French subsidiaries of UK companies held to be in the UK, situs of

70% of their activities, with UK parent controlling all purchases exceeding €5,000, negotiating all contracts, etc.

French cases

• Cour de cassation, Com. 27 June 2006 n° 03-19.863 – French insolvency proceedings for French subsidiary of Daisytek annulled because

English court had ruled that COMI of French subsidiary was in the UK; public policy grounds under Reg. 1346/2000 §26 for refusing to recognize a member state’s judgment are limited to manifest violations of fundamental rights, which did not include refusal of the English court to hear employee representatives before deciding to open insolvency proceedings

• Cour de cassation, Com. 13 September 2011 n° 10-25533, n° 10-25731 & N° 10-25908 (Belvédère) – although law of COMI controls the

insolvency proceedings, underlying contractual obligations remain subject to the law applicable thereto (in this case, NY law) including as to validity

Experience to date suggests that the system is working; what impact when COMI is in an exiting state?

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EU legislation and other applicable rules

Applicable rules – IMF article VIII (2)(b)

what exchange controls are consistent with the IMF agreement (Article VIII)

• Members not to impose or engage in restrictions on the making of payments and transfers for current international

transactions, discriminatory currency arrangements, or multiple currency practices, without the approval of the IMF.

• “The guiding principle . . . is whether [the measure] involves a direct governmental limitation on the availability or use of

exchange as such” (IMF)

Review of cases in multiple jurisdictions (England, U.S., France, Germany, the Netherlands and Luxembourg) suggests that:

• For some contracts there is a significant risk of unenforceability, after

adoption of exchange control measures by an exiting state.

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EU legislation and other applicable rules

Applicable rules – overriding mandatory provisions and public policy

Despite the parties’ choice of applicable law, application of:

• “overriding mandatory provisions” of the law of the forum state
• Kuwait Airways Corporation v Iraq Airways Co & Anor [2010] EWCA Civ 740: “Having forcibly invaded Kuwait , seized its assets,

and taken KAC's aircraft from Kuwait to its own territory, Iraq adopted this decree as part of its attempt to extinguish every vestige of Kuwait's existence as a separate state. An expropriatory decree made in those circumstances and for this purpose is simply not acceptable today.” “. . . A breach of international law of this seriousness is a matter of deep concern to the worldwide community of nations…Such a fundamental breach of international law can properly cause the courts of this country to say that, like the confiscatory decree of the Nazi government of Germany in 1941, a law depriving those whose property has been plundered of the ownership of their property in favour of the aggressor’s own citizens will not be enforced or recognised in proceedings in this country. Enforcement or recognition of this law would be manifestly contrary to the public policy of English law…”

• Yukos Capital SARL v OJSC Rosneft Oil Company [2012] EWCA Civ 855 (27 June 2012): “. . . the exception where English public

policy is concerned embraces discrimination, at any rate where it amounts to a form of persecution as in the context of Nazi legislation

• r to what has been referred to as ‘flagrant’ breaches of human rights; but it has not as yet recognised expropriation without

compensation as having been outlawed by clearly established international norms. . . . the act of state doctrine does not prevent an investigation of or adjudication upon the conduct of the judiciary of a foreign state, whether that conduct lies in the past, or in the future, and whether or not its conduct in the past is relied upon as the foundation for an assessment of the risk as to its conduct in the

• future. . . . the question is whether in the modern world the English court can be asked to recognise judicial decisions which a party to

those decisions alleges have been brought about by judicially corrupt means. ”

This rule could be invoked but will protective measures of exiting states by treated like these cases?

law of the place of performance (when that law makes performance illegal)

• Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 – English law charter party rates could not be recovered in England

above the amount thereof allowed in the place of performance (Spain)

This rule could impact many contracts with counterparties in exiting states.

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EU legislation and other applicable rules

Applicable rules – overriding mandatory provisions and public policy (cont’d)

Objection to enforcement of a judgment of another member state’s court on grounds that it is “manifestly contrary to public policy in the Member State in which recognition is sought” (BI §34(1))

• Public policy exception is determined by national law within limits set by ECJ
• Review of ECJ and other cases suggests that:

Public policy exception would probably not prevent enforcement of judgments from courts in exiting states.

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Practical legal issues for contracts with private counterparties

Risk assessment

assess risks to counterparties from economic disruptions assess risks under contract due to currency changes, exchange controls and other possible EU legislation (which might validate redenomination or similar measures) – factors to consider include:

• key contract clauses (see previous slides)
• possible change in EU law
• place of performance including payment (possible interference of overriding mandatory

provisions in place of performance)

• dispute-resolution forum
• enforcement: availability of assets; possible interference of public policy in place of

performance

evaluate possible modification or other protective measures new undertakings – drafting with foresight what notice or disclosure (to counterparties, to investors, to the public) is required or appropriate what records to keep of steps to assess and minimize risks

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Practical legal issues for contracts with private counterparties

Contract clauses, including: applicable law, choice of forum, currency & payment,

defaults/MAC/MAE/cross-default, force majeure/illegality/impossibility and resulting modifications to contract, representations (particularly when given periodically), indemnification for costs, termination, etc.

Debt

• key clauses include: bondholders’ decisions /collective action clauses/disenfranchisement;

decisions/actions of the trustee or other representative (including law applicable thereto); consequences of reduction of return or increased cost resulting from change in law

• location of elements of the transaction
• security arrangements/custody/guaranties/guarantor
• lending pools (e.g., bank debt) and situation of pool members

M&A/equity investments

• risks to highlight: country risk (short-term/long-term), customers/suppliers, financing sources,

infrastructure, exit/break-up/redenomination/capital controls, compliance

• implications for due diligence, reps & warranties, closing conditions (e.g., MAC/MAE clauses),

indemnification, price/earn-out

Sources of financing/investment Derivatives

• key features: representations re compliance with applicable law; termination events/events of default

(including for illegality); close-out mechanics; terms relating to collateral; whether an “exchange contract”

• applicable form of Master Agreement (1992 or 2002)

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Practical legal issues for contracts with private counterparties

Sample trust indenture/trust deed language

Currency clause

“All references in the Base Prospectus to . . . 'euro' and '€' refer to the currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended.”

Modification by collective action

“Modifications of and amendments to the indenture or to the terms and conditions of either tranche of the bonds may be made, and future compliance with the indenture or the terms and conditions of the bonds or past default by [borrower] or [guarantor] may be waived, with the consent of the holders of at least a majority in aggregate principal amount at the time outstanding of the bonds of the applicable tranche. However, without the consent of the holder of each bond affected, modification, amendment, waiver or consent may not: . . . change the currency or place of payment of principal, interest or additional amounts on the bonds; . . ..”

Multiple choices of law

“Save as set out below, the Notes and all non-contractual obligations arising out of or in connection with the Notes, the Issuance/Payment Agreement, the Guarantee and the Deed of Covenant] are governed by English law. Paragraphs x, y & z [relating to subordination and to the appointment of the trustee and syndicate of bondholders] are governed by Spanish law.”

Contemplation of illegality under local law

“The Agency Agreement, the Guarantee, the Deed of Covenant, the Deed Poll, the Notes, the Receipts and the Coupons and any non- contractual obligations arising out of or in connection with the Agency Agreement, the Guarantee, the Deed of Covenant, the Deed Poll, the Notes, the Receipts and the Coupons are governed by, and shall be construed in accordance with, English law.” “The Issuer agrees . . . that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with the Notes, . . . or the Coupons (including a dispute relating to any non-contractual obligations arising of or in connection with the Notes, the Receipts and/or the Coupons) and that, accordingly, any suit, action or proceedings (together referred to as “Proceedings”) arising out of or in connection with the Notes, the Receipts and the Coupons (including any Proceedings relating to any non-contractual

• bligations arising out of or in connection with the Notes, the Receipts and/or the Coupons) may be brought in such courts.”

“If any of the following events (each an “Event of Default”) shall occur: . . . the Guarantee shall be held in any [final] judicial proceedings . . . to be unenforceable or invalid or shall cease for any reason to be in full force and effect . . . “ “To ensure compliance with Italian law, the Guarantee will be limited to 200 per cent. of the aggregate principal amount of the Notes.”

Specific reference to local insolvency proceedings involving guarantor

“The Notes are issued in accordance with requirements prescribed by Spanish company law. On the insolvency (concurso) of the Issuer or the Guarantor, the Law 22/2003 will determine the ranking of the Notes and/or the Guarantee, and will prevail over certain provisions of Terms and Conditions of the Instruments and/or the Guarantee.”

Reid Feldman Kramer Levin Naftalis & Frankel LLP

47, avenue Hoche 75008 Paris, France telephone: + (33) 1 44 09 46 03 fax: + (33) 1 44 09 46 01 rfeldman@kramerlevin.com

Questions?