Arranger of New Issue Owes Duty of Care to Investors

A ground-breaking judgment of the High Court has established that a duty of care is owed to investors by a bank which has assisted a borrower to arrange a publicly listed capital market issue. Although the case concerned an Islamic financing transaction, widely known as a sukuk, the terms of the judgment suggest that this duty of care exists in the vast majority of new issues of securities where English law is relevant.

This judgment raises many questions for banks and other parties actively involved in arranging new issues of securities. A number of current market practices may be revisited as a result of this judgment and there may now be a period during which new practices evolve in response to its implications.

The Claim

This case¹  concerned a new issue of sukuk certificates to raise money for a company registered in Saudi Arabia. It was effected by an extensive suite of transaction documents (the Transaction Documents) most of which were expressed to be governed by English law. However one of them, a Promissory Note issued by the Saudi company, was expressed to be governed by the laws of Saudi Arabia.

Following a default in payments under the certificates it became apparent that the Promissory Note had not been properly executed. Subsequently some certificate holders brought an action against the bank described as the Arranger of the issue on the basis that the Arranger owed the holders a duty to exercise reasonable care and skill to ensure that the Transaction Documents were properly executed and that the holders had suffered a foreseeable loss as a result of the Arranger's failure to fulfil that duty.

The Offering Circular

The issue was marketed on the basis of an Offering Circular in conventional form for this type of transaction, including typical responsibility statements. On the front cover of the Offering Circular various banks were identified as Lead Managers or Joint Lead Managers and one of them was identified as Arranger and Sole Bookrunner. The inside front cover of the Offering Circular contained a relatively standard disclaimer to the effect that the Lead Managers, one of which was the Arranger and Sole Bookrunner, made no representation or warranty and accepted no responsibility as to the accuracy or completeness of the information in the Offering Circular.

The Role of Arranger

The front cover of the Offering Circular described the Arranger as the "Arranger and Sole Bookrunner" but its responsibilities in this capacity were not further defined. Expert evidence to the court agreed that:

• although a sukuk has to be structured in order to comply with Shari'ah law, this makes no real difference to the role of an arranging bank which will be essentially the same as in the case of a conventional Eurobond issue;
• there is no fixed list of tasks or responsibilities associated with a title such as “Arranger” or “Bookrunner”;
• nevertheless some tasks will be common to all such transactions and one of these is to ensure that the transaction documents are properly executed.

Duty of Care

In this type of transaction there is no express provision by which an Arranger assumes a duty of care to any investors. To the extent that the transaction documents address this issue at all it is to seek to disclaim liabilities to the investors on the part of the Arranger. Indeed counsel for the Arranger argued that the parties had carefully constructed an elaborate contractual scheme which described in detail the rights and obligations of the various parties and therefore the court should not impose upon this scheme any additional duties.

However the circumstances in which, in the absence of an express provision, a duty of care will be found to exist in English law are well established and are often summarised as the threefold test: whether loss to the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; whether the relationship between the parties was one of sufficient proximity; and whether in all the circumstances it is fair, just and reasonable to impose a duty of care on the defendant towards the claimant.

Duty of Care in relation to the Promissory Note

The court considered, amongst other things, whether the Arranger owed investors a duty of care to arrange for proper execution of the Promissory Note.

On the first limb of the threefold test the judge had no difficulty in concluding that loss to certificate holders was a reasonably foreseeable consequence of the Arranger failing to ensure proper execution of the Promissory Note. In this structure the Promissory Note had one purpose only. That was to provide certificate holders with a simple and relatively straightforward claim against the obligor in the event of a default under the certificates.

On the question of proximity, it was the Arranger which ensured that it was prominently described as such on the front of the Offering Circular as it wanted the market as a whole, including prospective investors, to understand the prominent role which it had played in bringing the issue to market. Any prospective investor would understand (as the Arranger wanted investors to understand) that the Arranger had been responsible for the preparation of the Offering Circular and the preparation and execution of the Transaction Documents. Prospective investors would know that the Arranger had its own interests, both financial and reputational, in ensuring that these responsibilities had been properly discharged.

On the final limb, the judge found that to impose a duty to ensure proper execution would not require an arranging bank to do anything which it would not do in any event, it would not in any way undermine the contractual structure and it would be consistent with the Offering Circular, including the usual disclaimers. 

Disclaimers

In this context, it is important to note that the usual disclaimers of responsibility for the contents of the Offering Circular should not be conflated with disclaimers of responsibility for ensuring proper execution of the Transaction Documents. It is one thing for an arranging bank to disclaim responsibility for what it is told by its client (the disclosure in the Offering Circular). It is quite another for an arranging bank to disclaim responsibility for the proper performance of its own functions (such as taking reasonable care to ensure proper execution of the Transaction Documents). There was no suggestion in any of the disclaimers in the Offering Circular for this issue that the Arranger sought to disclaim any responsibility of this latter type.

The judge accepted that it is open to an arranging bank to include an express disclaimer negativing any responsibility to ensure that an important document for the protection of investors is properly executed. However, his opinion was clearly that a bank which wanted to disclaim such responsibility would need to do so in clear terms with all the negative implications for the success or otherwise of the issue that such a disclaimer might involve.

Primary Market vs. Secondary Market

It is also important to note in the context of this duty of care that the judge found there is no difference between immediate purchasers of certificates in the primary market and those who purchased subsequently in the secondary market after issue. Indeed the claimants in this case were secondary market purchasers. It was clearly in the contemplation of all parties including the Arranger that a secondary market in the certificates would develop and that was one of the Arranger's stated intentions. Also the Offering Circular was provided not only to prospective subscribers at the time of issue but also was made available to prospective subsequent purchasers of certificates in the secondary market.

Conclusions

This is the first time in English law that a duty of care has been found to be owed to investors by a bank which has assisted a borrower to arrange a publicly listed securities issue. While this case involved a sukuk structure in which an underlying Promissory Note played a key role, it has nevertheless established an important principle with potentially much wider application. There is also much interesting commentary in the judgment on other aspects of the transaction documentation. This includes the arranging bank's responsibility for the contents of an offering circular and the extent to which it may disclaim that responsibility, and common practices for execution of transaction documents in an international context.

In the light of this judgment arranging banks (and others) will likely wish to revisit the scope of the disclaimers which they typically seek to include in offering documents to describe more precisely the extent of the responsibilities which they are prepared to accept and the things for which they are not prepared to accept responsibility. This may have consequential effects on the description of risk factors in the offering documents.

Where a new issue is arranged and managed by a syndicate, the syndicate members may wish to describe in some detail their respective roles and responsibilities with related disclaimers tailored accordingly. There may also be less enthusiasm amongst potential syndicate members to be named as such in offering documents if they do not in practice intend to play an active role in the new issue process. The more complex the structure of the new issue the more the implications of this judgment are likely to come into focus.

^{1 Golden Belt 1 Sukuk Company B.S.C.(c) v BNP Paribas and Others [2017] EWHC 3182 (Comm).}