Golden Belt Podcast Transcript

Speakers: Tim Morris, Ashurst (TM), Fran Kucera, Ashurst (FK), Chris Hardingham, Ashurst (CH)

TM: Hello, my name is Tim Morris.  I'm a consultant in the Debt Capital Markets practice at Ashurst and today I'm joined by Fran Kucera, who's a partner in the Debt Capital Markets practice and Chris Hardingham who is counsel in the Debt Capital Markets practice and today we're going to be looking at the duty of care, which investment banks arranging issues of securities may owe in English law to investors in those securities.

If I can just spend a minute setting the scene explaining why this is important, at this particular time. It has long been thought, by English lawyers that managers or underwriters of securities offerings may owe a duty of care to investors in those securities quite apart from any statutory responsibilities.  They may owe a duty of care as a matter of general law by virtue of their role in arranging the issue or bringing it to market and investors' legitimate expectations for the actions which those managers or underwriters take in relation to the offering document and indeed that's one of the principal reasons why you often find a disclaimer of managers' or underwriters' liabilities in the front of an offering document.  But in this particular decision of the English High Court in December 2017, the judge found applying these sorts of principles that the arranger of an issue of securities had a duty of care to investors, not over the contents of the offering document but over the question of due execution of one of the important issue documents that was important in bringing the issue to market.

Now this particular case, which involved a company known as Golden Belt, was actually a rather structured financing, an Islamic financing, known as a Sukuk. But, Chris, perhaps I can bring you in here and ask you, do you think that this decision is restricted to this type of structured financing or do the principles that the judge used have a wider application in capital markets, generally?

CH: Well the case concerned a Sukuk as you say Tim, and some fairly particular and factual circumstances but I think it's fair to say that the findings of the judge are relevant really to all types of DCM transactions and particularly any other transaction where a lead bank adopts certain responsibilities vis-à-vis investors or other banks in the context of financing transactions wherever English law is relevant.

And it's not just arranging banks that need to be aware of this: it also brings the role of the docs bank perhaps into focus as well, because in those situations obviously one bank takes on a responsibility for managing the documentation process and following the conclusions of the case, exposes themselves to certain liabilities as a result of taking on that role and the case has really put under the spotlight, a number of market practices and protocols that the market's been used to following for a number of years and has given DCM practitioners the opportunity to stand back and perhaps look at some of those practices and see that they're fully effective in all circumstances.

TM: Yes, going forward, this case is probably going to make a lot of underwriters or managers examine what they can do to mitigate the risks that might perhaps arise from this judgment, and one of the things they might be looking at is perhaps defining more closely the role that they actually undertake in bringing a new issue to market.  So, Fran, perhaps I can turn to you here, and the Golden Belt case in particular focused on the arranger or the lead manager of the issue: do you think that there's anything that arrangers or lead managers might do, going forward, to try to define more closely the nature of their role and their activities in new issues?

FK: I think there is and we are already starting to see some reactions to this case in terms of what investment banks are looking to put into mandate letters and also into offering circulars in terms of disclaimers.  I think as Chris mentioned, it is important not to be hung up on the term "arranger".  I think the Judge actually says in the judgment it's not the name of what you call yourself it's the functions you're performing and the mandate letter in question actually clearly states that the bank arranging would be responsible for the preparation, negotiation and execution of the transaction documents. A couple of things we're seeing already: we have seen people asking for an insertion in that sort of line to talk about "in co-ordination with legal counsel", so that if they want to delegate that responsibility to their counsel they can do under the terms of the mandate letter and I think we should remember that what happened here is not that the arranger was being asked to ensure that everything was executed properly, because you can never exclude things like fraud, but it’s the steps that you take to try and make sure everything is done.  So the standard is that of the reasonably competent banker in the circumstances and I think it's certainly arguable that if you instruct an internationally recognised law firm with experience in the capital markets then actually you have discharged that responsibility to the arranging bank, and so we're seeing banks, in relation to documentation, inserting reference to legal counsel in the mandate letter and actually we've seen a couple of mandate letters where it clearly states that the arranging bank is not responsible for execution of the documentation by the issuer.  So although that would not necessarily get the arranger out of all problems, if there were problems with the execution, it does mean at an early stage in the mandate letter that you're saying to the issuer, the client of the investment bank, that they're responsible for their execution of documents and that actually you will liaise and maybe even delegate to your legal counsel to do that.  So yes, we are certainly seeing changes in practice in relation to this case.

TM: Yes I think in the Golden Belt case everybody accepted that the arranger of the issue had taken on some responsibility for the due execution of all the issue documents and it may be, as you say going forward, that investment banks may seek to restrict the scope of that particular role but also I think, Chris if I can come back to you, we're also seeing now some instances where managers or underwriters are seeking to disclaim, in offering or marketing documents, any responsibilities along these lines.  Have you seen instances of this?

CH: We have, yes, I mean the case includes some interesting observations from the Judge with respect to disclaimers and some of the good news in that case is that the court, specifically, acknowledged that cases such as IFE v Goldman and JP Morgan v Springwell demonstrate that disclaimers can be affective in limiting and excluding duties such as for misstatements or loose disclosure in an offering document. Here it wasn't such a question of disclosure, what we were looking at here is the particular transaction document which had not been validly executed and the judge in this case said that the disclaimers in the offering circular were not specific enough on that point to exclude responsibility vis-à-vis the arranger. The judge did leave it open to banks to try to include such an express disclaimer and negate their responsibility to ensure that certain documents may be properly executed but the judge was very clear to say that any such disclaimer would need to be particularly precise and prominent in casting upon investors what he described as the risk that they may be purchasing worthless documents.  Nonetheless, we have started to see some changes to disclaimers.  We've seen a range of proposals from very wide wording in terms of legality, effectiveness, any responsibility at all for a transaction document. Which follows the LMA style wording, which is commonly seen in Facility Agreements.  So in addition to that we've also seen disclaimers attempting to limit responsibility for acts or omissions of the Issuer.  So a range of proposals have been put forward, I think there is some question as to whether or not disclaimers of that nature would be fully effective in meeting that standard of being sufficiently precise and prominent, to use the judge's words, but I think given the option of including such wording or not including it, an arranger bank generally would go towards including it.

TM: And as you say there is a line of English cases which has demonstrated quite strongly that in appropriate circumstances disclaimers will be effective so perhaps from an arranging bank's perspective there's only upside in including a disclaimer.  Okay, we've talked about defining more precisely the roles of underwriters or managers in bringing new issues to market and we've also talked about documentary solutions to mitigate the risks.  Fran, can I turn to you again, what about the possibility of pushing more of the risk onto external counsel, either in terms of the role that they take or in terms of the legal opinions that they're asked to give in these transactions?

FK: Yes, as I mentioned previously I think it is arguable that if the bank involved had delegated clearly to its international counsel the responsibility for making sure documents are executed properly, it may well have discharged its responsibility and we wouldn’t be talking about the case.  Is it going to change practice across the Eurobond markets?  I don't think so but when you are in certain jurisdictions where there are certain protocols that need to be followed - for example here it was a wet ink signature – it may be that you have to have documents witnessed, it may be that you need things notarised.  There's a whole raft of things that may happen in different jurisdictions.  I think banks will look more closely at what they need to do to make sure everything is done properly.
I think what we have here in relation to the signature of the document, the bank sought to rely on the fact that signing ceremonies are no longer usual and whilst that's true I think there is, obviously, a range of things that can be done in between having a full blown signing ceremony and just faxing a document out to someone and saying please can you sign it and send it back to me and I think that, you know depending on what is needed, what jurisdiction you're in, people should think about the processes.  I know for example, I think in Turkey, that you always have a signing at lawyers' offices so lawyers can make sure all the documents are signed properly and obviously here the bank was advised to have witnesses, not because the document needed to be witnessed under Saudi law, but actually those witnesses could stand up and give evidence, if needed, that it had actually been executed.

On the legal opinion front, because obviously this goes to execution and people go well why didn't they get a legal opinion on it, there were English, Saudi and Bahraini lawyers involved in this transaction, all of them gave legal opinions but all of the legal opinions had the very standard assumption that all signatures were genuine.  So therefore, when talking about a signature on a document it's been assumed away and although, you know, one can never exclude fraud, you can take steps to try and make sure that the right person is signing the right document in the right way.  I remember, back in the day when I was a junior associate, going over to Hammerson plc, the CFO I think it was at the time, sitting with the directors, Mr Bonham, I asked him to bring his passport, the company secretary was there.  I looked at his passport, it looked like him, had the right name, I asked the company secretary "was this Mr Bonham?" and he said "it is", and he signed.  It could have been his identical twin brother.  I mean I couldn't exclude that but you can take steps and again, going back to the point I made earlier, the standard the banks have to adhere to or to meet is that of a reasonably competent bank in the circumstances and actually taking those steps is a reasonable thing to do and so one would think doing that you've then, sort of, discharged your responsibility.  So you can never exclude fraud and things like that but you can certainly take steps to reduce it.

One other thing I want to say is that lawyers often turn around and say "well we can't say anything about that because it's a statement of fact and not a statement of law" and legal opinions are only about statements of law.  However, I don't think there's anything wrong with a lawyer listing steps it has taken for a factual perspective, to back up statements in the legal opinion.  I think circumstances in certain jurisdictions that I mentioned, I think, you know, it might be wise for investment banks, arranging banks, to actually say to their lawyers, you know, can you please set out what you have done to ensure that the transaction is being duly authorised, the company's got capacity, the person signing has got the right authority and that it has actually been duly executed and I think we may in certain jurisdictions see a bit more of that.

TM: Yes, and indeed we already see some of that in legal opinions where it's common for lawyers to list the steps that they've taken, for example, to check filings or registrations so, again, those are questions of fact but they are actually enumerated in opinions.  Chris, if I can come back to you, perhaps, to wind up.  We've talked a little bit about the arrangements for executing issue documents, would you like to add anything in terms of how the steps that a manager or a underwriter might take in the future around the signing or execution of issue documents, to try to avoid these sort of problems arising in the future?

CH: Well the facts of the case were fairly specific here, and really two points are worth noting.  Firstly, a wet ink signature was required in Saudi law and evidence showed that it was in fact a laser signature, and secondly, was the point about witnesses.  As Fran mentioned it’s not a formal requirement of Saudi law but it was important to have the document witnessed independently in case the execution of the document was challenged in the future.  So I think it's important to understand, at the outset of the transaction, especially when dealing with a foreign jurisdiction which you may not be familiar with, what are the formalities for execution of the documents and therefore whether it's appropriate in the circumstances to organise a formal signing ceremony.  Now it's unlikely that we're going to see a great increase in signing ceremonies for regular MTN drawdowns or investment grade transactions where the practices are well established but it does put under the spotlight the need to really look into these matters at an earliest stage as possible in the transaction so that everyone's clear about what needs to be done at the relevant time. 

FK: I guess one thing to add is that in this case the relevant bank brought a defence that it had relied on the advice of its lawyers as to the execution of the documents and, I think it's important, the judge said "you took the advice of the lawyers but actually you then took responsibility for carrying that out and that is not what happened" so I think it needs, you know, the bank should be clearer in their relationships with the lawyers.  They thought they relied on their advice but actually the judge said "no, under the circumstances you took the advice on board but then actually you took the responsibility for carrying it out" and so that's again, I think, something the banks need to think about.  If you are delegating, make it clear and make it clear exactly what you want because they ask for two independent and known witnesses and actually the two witnesses who actually turned up were not independent and they were not known to the bank or its lawyers.  So, I think that's a case there where you make sure, if you do take advice, you carry it through.

TM: So if I can just sum up in a few words.  It seems as though this has been a very significant decision of the English High Court.  I think it's likely that it's going to cause people to look more closely than perhaps they have done at the arrangements around bringing new issues to market and particularly executing and signing significant issue documents.  We may also see some changes to the text of disclaimers or some additions to disclaimers and offering documents and marketing materials, and maybe some more close attention to the respective roles of underwriters or managers and their external counsel, in particular around clarifying who does what and the contents of formal, legal opinions that counsel deliver.  But I think it's probably fair to say that these changes are likely to be more at the margin than fundamental in terms of market practises and I think that's probably about as far as we can go, at the moment.  Having said all that, there is, on the Ashurst website at Ashurst.com, a more detailed briefing describing the principles of this judgment and also looking at some of these implications that we talked about today in a bit more detail.

The information provided is not intended to be a comprehensive review of all developments in the law and practise or to cover all aspects of those referred to.  Listeners should take legal advice before applying it to specific issues or transactions.