PLC - Material adverse change event established and appropriation not i... Page 1 of 9 Material adverse change event established and appropriation not invalid but relief from forfeiture available (Privy Council) Resource type: Legal update: case report Status: Published on 14-Feb-2013 Jurisdictions: England, Wales In Cukurova Finance International Limited and Cul<urova Holding AS v Alfa Telecom Turl<ey Ltd [2013] UKPC 2 (30 January 2013), the Privy Council examined whether the material adverse change event of default in a facility agreement had been established, whether the exercise of the remedy of appropriation had been vitiated by bad faith or improper purpose and whether the equitable remedy of relief from forfeiture was available. Jonathan Lawrence of K&L Gates LLP has commented on the decision for PLC Finance. PLC Finance Speed read The Privy Council has agreed with the decision of the Court of Appeal of the Eastern Caribbean Supreme Court that the material adverse change event of default had been established by Alfa Telecom and that Alfa Telecom had not exercised the remedy of appropriation in bad faith and for an improper purpose. The Privy Council also decided that relief from forfeiture should be available to Cukurova but invited further submissions as to the basis and terms on which it should be granted {Cukurova Finance International Limited and Cukurova Holding AS v Alfa Telecom Turkey Ltd [2013] UKPC 2). Jonathan Lawrence of K&L Gates LLP has commented on the decision for PLC Finance. Background Material adverse change event of default A material adverse change (MAC) event of default (www.practicallaw.com/9-107-6565) usually refers to any event or circumstance that may materially and adversely affect the following: 3 A borrower and its group. a The ability of a borrower and its group to perform its or their obligations under the finance documents. 3 The security granted in connection with a facility agreement. This clause is a "sweep-up" event of default. It allows a lender to capture unforseeable events or circumstances that perhaps do not give rise to an event of default under one of the other events of default drafted to catch specific concerns that the lender was able to identify when the facility http://finance.practicallaw.com/4-524-0432 14/02/2013
PLC - Material adverse change event established and appropriation not i... Page 2 of 9 agreement in question was signed. The vagueness of this event of default means its effectiveness is highly disputed and wrongful use could give rise to lender liability risks. For more information on a MAC event of default, see Practice note, Material adverse cliange (MAC) clauses in finance documents: MAC event of default (www.practicallaw.com/5-384-7022). Financial Collateral Arrangements (No.2) Regulations 2003 The Financial Collateral Arrangements (No.2) Regulations 2003 {SI 2003/3226) (FCA Regulations) implement Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements {OJ 2002 L168/43) (Directive) in the United Kingdom. The aim of the Directive is to simplify the process of taking financial collateral across the EU by introducing minimum uniform arrangements. The FCA Regulations apply to "financial collateral arrangements" which includes "security financial collateral arrangements" between two parties (both of whom must be non-natural persons) in which a security interest in the financial collateral is given by the collateral-provider to the collateral-taker coupled with the financial collateral being in the possession or under the control of the collateral- taker or a person acting on its behalf. "Financial collateral" is defined by the FCA Regulations as cash or financial instruments, such as company shares or equivalent securities, bonds or other tradeable capital markets debt instruments. For more information on the FCA Regulations, see Practice note, Financial collateral arrangements (www.practicallaw.com/8-212-1954). Appropriation Regulation 17 of the FCA Regulations provides that: "Where a legal or equitable mortgage is the security interest created or arising under a security financial collateral arrangement on terms that include a power for the collateral-taker to appropriate the collateral, the collateral-taker may exercise that power in accordance with the terms of the security financial collateral arrangement, without any order for foreclosure from the courts." This was the wording of regulation 17 as it applied to the facts of this case, but regulation 17 has since been amended. For information on the amendments made to regulation 17, see Practice note, Financial collateral arrangements: Changes introduced by the FCA Amendment Regulations 2010 (www. practical la w. com/8-212-1954). Appropriation is not defined in the Directive or the FCA Regulations. The Concise Oxford English Dictionary (Oxford University Press, 11th ed., 2006) defines "appropriate" as including "take for one's own use without permission". For more information on the right of appropriation, see Practice note, Financial collateral arrangements: Right of appropriation (www.practicallaw.com/8-212-1954). Relief from forfeiture http://finance.practicallaw.com/4-524-0432 14/02/2013
PLC - Material adverse change event established and appropriation not i... Page 3 of 9 The jurisdiction of a court to allow relief from forfeiture is equitable. It was first established in relation to leases of land and most commonly arises in that context. However, this relief may also be available in relation to other types of property where the forfeiture is of proprietary or possessory rights rather than mere contractual rights {BICCPLCyBum^^^^ Facts Corporate structure and background The appellants, Cukurova Finance International Limited (CFI) and Cukurova Holding AS (CH), are members of the Cukurova Group of companies. Before September 2005, CH owned 52.91 % of Turkcell Holding AS (TCH), the remaining shares in TCH being held by Telia Sonera Finland OYJ (Sonera). TCH held 51 of the 100 issued shares in Turkcell lletisim Hizmetleri AS (Turkcell), a Turkish mobile phone network provider whose shares are traded on the Istanbul and New York stock exchanges. In 2003 and 2004, the Cukurova Group was under considerable cash flow pressures and it entered into discussions with the Alfa Group with a view to alleviating those pressures. While discussions with the Alfa Group continued, Sonera contended that CH was obliged to transfer its shares in TCH to Sonera pursuant to an alleged pre-emption agreement. It became clear in the discussions with the Alfa Group that the shares in Turkcell and TCH might be important in any agreement reached between the Cukurova Group and the Alfa Group. Therefore, to defeat Sonera's claim to CH's shares in TCH, CH transferred those shares to a newly incorporated BVI company, Cukurova Telecom Holdings Limited (CTH). CTH was wholly owned by CFI. Documentation and proceedings On 1 June 2005, CH and CFI entered into a subscription agreement (Subscription Agreement) with Alfa Telecom Turkey Limited (ATT) under which: a In return for a subscription price of US$1.6 billion from ATT, CFI had to procure that CTH issued convertible bonds to ATT which, when exercised, would give ATT 49% of the issued shares in CTH, leaving CFI with the remaining 51%. 3 ATT would enter into a facility agreement (Facility Agreement) under which it would grant CFI a secured facility (Secured Loan) of US$1.352 billion (secured by charges over CFI's shares in CTH and CH's shares in CFI), and an unsecured facility of US$355 million. a The parties agreed to enter into a shareholders agreement. On 17 June 2005, Sonera began arbitration proceedings against CFI in Geneva, claiming specific performance of the pre-emption agreement. On 28 September 2005, ATT and CFI entered into the Facility Agreement. The Facility Agreement contained various events of default, including a material adverse change (MAC) event of default at http://finance.practicallaw.com/4-524-0432 14/02/2013
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