In a decision which will cause concern to many who work in capital markets, the High Court has found that a bank arranging a publicly listed issue of debt securities owed a tortious duty of care to investors and that it breached that duty. The bank acted as the arranger of a sukuk (an asset-based Islamic financing transaction) and the duty found to exist was to ensure that a transactional document providing certificate holders with a claim against the underlying obligor (in the event of default by the obligor) was properly executed.
The imposition of the duty in this case was said to have been justified by the court on the basis that it was limited and specific, and because it was imposed following the application of established principles to the specific facts of the instant case. In that sense, the decision is capable of being distinguished in future cases or confined to its particular facts, and so it does not necessarily follow that it will provide a proper or firm basis on which to bring proceedings which require the imposition of a broader duty of care.
However, there is a risk that the judgment represents a novel extension of the law in the context of capital markets transactions. Until now, those advising on capital markets transactions have operated on the basis that – while there was a risk that an arranging bank may owe tortious duties to investors (which has typically been addressed by appropriately worded disclaimers) – this risk was relatively low in the absence of a precedent holding that such a duty existed.
The High Court has granted permission for the bank to appeal the decision. This is unsurprising, particularly given the novel duty of care established.
Although the decision is subject to an appeal, there are a number of immediate implications for financial institutions to consider:
- Disclaimers: Arranging banks might consider seeking the inclusion of an express disclaimer in offering circulars in relation to issues in certain jurisdictions negating any responsibility to ensure that transaction documents more generally are properly executed (as well as other more mechanical tasks), in addition to existing disclaimers.
- Risk and compliance: Arranging banks may look to take practical steps to minimise risk in relation to the execution of transaction documents – these may include physical signing meetings, insisting on the arranging bank’s international or local counsel being physically present at signing meetings, or perhaps the use of technology to provide virtual attendance at signings. However, there are likely to be difficulties in striking a balance, which can be applied on a consistent basis across different markets and jurisdictions, between efficient practice and over-engineered signing procedures, particularly where it is reasonable for arranging banks to assume that issuers and their representatives are acting in good faith.
- Coordination between an arranging bank, its local counsel and its international counsel: The case highlights the need for close coordination between these parties. Parties might additionally consider appointing separate international and local counsel for the issuer and the arranging bank to assist in the scrutiny of execution procedures, particularly under local laws (and thereby seek to protect against a finding of any breach of duty, if found to have been owed). In this case, it appears that neither the issuer nor the delegate had separate legal representation to the arranging bank and, while it is speculative to suggest so, it is possible that this may have influenced the court’s approach in attributing duties to the arranging bank, in the absence of separate issuer’s counsel.
- Mandate letters: Arranging banks may wish to consider changes to their standard engagement terms to define expressly their responsibilities to assist an issuer, and perhaps affirm that the responsibility for creating legal, valid and binding documents lies with the issuer (as it represents in the subsequent underwriting / subscription / purchase agreement) and, more generally, to review the allocation of responsibilities between arranging banks (and their counsel) and issuers (and their counsel).
- Condition Precedent Waiver: Arranging banks may wish to ensure that there is no discretion to waive the condition precedent that the documents have been duly executed.
It may be prudent for a financial institution performing the role of arranger for distressed credits to carry out a risk evaluation of its functions, to identify any functions on which investors might place reliance. This would include a review of the offering circular and any other documents in which the arranging bank is specifically named and have been made available to potential investors.
For a detailed analysis of the case and its implications, read our e-briefing.