2 The Contractual Framework and its Anglo-Saxon Origin
The Norwegian authorities have not adopted any regulations pertaining to entities appointed as bond trustees. Nor is there any public supervision of trustee activities. As a result, the bond market and its contractual framework have been developed by commercial stakeholders, inspired by the model found in the Anglo-Saxon markets. As this article will explain further in section 6, the legal status of the bond trustee is quite clear in both the UK and the US, mainly due to the origin of the common law trusteeship in these countries. In Norway, however, the trusteeship is still a foreign concept without a definite legal status. Hence, the UK and US bond trustees and bond markets heavily influence the functions and legal status of the Nordic Trustee under Norwegian law.
Prior to setting out the main features of the Norwegian contractual framework, it is necessary to consider briefly the Anglo-Saxon model, which served as its inspiration. The bond trustee’s responsibilities and obligations are typically enshrined in a trust deed in the UK or a trust indenture in the US, each of which confers certain powers to the trustee. Both the UK and the US have adopted regulations pertaining to the bond trustee, but most areas are left open to contractual negotiation.(1) Note that there are differences in the regulation of the bond markets between the UK and the US. The US federal regulation is stricter than that found in the UK, but this mainly concerns the obligations of the bond trustee, see the US Trust Indenture Act of 1939 15 U.S.C. cf. the UK Trustee Act (2000). See also section 6 below for further differences concerning the discretional powers of the bond trustee and limitations on the application of the no-action clause in the US. The Anglo-Saxon market has established more or less standard provisions that make up the contractual framework.(2) As observed by the Circuit Judge in Sharon Steel Corp. v. Chase Manhattan Bank, 691 F.2d 1039, 1048 (2d Cir. 1982) Thus, the trust deed or indenture typically contains three categories of provisions: financial terms, protective covenants and miscellaneous provisions.(3) Marcel Kahan, ‘Rethinking Corporate Bonds: The Trade Off between Individual and Collective Rights’ 77 New York University Law Review 1040-1058, 1044 These categories of provisions are also found in the Nordic Trustee’s standard bond terms. One major difference, however, is that the trust deed or trust indenture is only entered into between the issuer and the bond trustee in its capacity as such. The bondholders are not themselves party to the deed or indenture, whereas in Norway, the individual bondholders are, by subscription to the bond issue, agreeing to be bound by the bond terms, which are entered into on their behalf by the Nordic Trustee.
Bond issues subject to Norwegian law are, with few exceptions, based on the Nordic Trustee’s standard templates.(4) This is due to the fact that the Nordic Trustee has monopoly as bond trustee in the Norwegian market, see Letter from the Nordic Trustee to the Ministry of Finance dated 27 October 2009 available at <www.regjeringen.no/contentassets/341240bc72f946ba80a76d169e873c41/brev_norsk_tillitsmann_27.10.09.pdf > accessed 31 March 2017 Unlike conventional bank financing, the terms of the bond issue are agreed between the issuer and the lead manager,(5) The lead manager, typically an investment bank, is engaged by the issuer to facilitate and secure subscription to the bond issue. subject to complying with the main terms of the Nordic Trustee’s standard bond terms. The investors – future bondholders – do not take part in these negotiations, but the lead manager ensures that the terms are acceptable to the market in order to secure subscription to the bond issue.
Before subscribing, the investor is presented with a bundle consisting of an investor presentation, a term sheet and an application for subscription. The investor presentation, prepared by the lead manager, contains the main sales pitch with company information, accounts and expected revenue. The term sheet, on the other hand, sets out the main terms and conditions of the bond terms, including specific issuer covenants.(6) See the Nordic Trustee’s standard term sheet (NBT_TS_All Nordic_final_March 2016) available at Nordic Trustee ‘Documents’,<nordictrustee.com/documents> accessed 16 March 2017 Subscription to the bond issue is made by completing the standard application, which inter alia authorises the Nordic Trustee to enter into the bond terms on behalf of the bondholder. When bonds are traded on the secondary market, each new bondholder is considered as acceding to the bond terms.(7) The Norwegian alternative of cl. 16.1 (a) of the Nordic Trustee’s standard bond terms (n 6)
If the bonds are secured, there will be an additional set of security documents, whereby the Nordic Trustee is the holder of security on behalf of the bondholders. In this way, the Nordic Trustee will be able to realise and enforce security if necessary upon an event of default.
After subscription to the bond issue, bonds are allocated to the bondholders through the central securities depository, Verdipapirsentralen ASA (“VPS”). VPS conduits payments of principal (if any) and interest to the bondholders, as well as distributing information and summons to bondholders’ meetings. An up-to-date record of bondholders is also kept by VPS.(8) Letter from the Nordic Trustee to the Ministry of Finance dated 27 October 2009 (n 12) Despite this, only 20% of the bondholders are registered directly in VPS’ records,(9) ibid as bonds are commonly held by custodians.(10) For instance Euroclear or Clearstream. About 80% of the bondholders can only be identified by access to the custodians’ account books, which is not publically available.(11) Letter from the Nordic Trustee to the Ministry of Finance dated 27 October 2009 (n 12) Only national supervisory authorities have a right to inspect the custodians’ records. Access to these records will therefore require a court ruling against the custodian in its local jurisdiction, and cannot be granted by Norwegian courts unless the custodian is domiciled in Norway.
The Nordic Trustee ensures that the bondholders’ rights vis-à-vis the issuer are monitored and enforced.(12) Nordic Trustee, ‘Bond Trustee’, <nordictrustee.com/bonds> accessed 16 March 2017 All rights and obligations of the Nordic Trustee are set out in the bond terms. The bondholders are tied together through this agreement in an indissoluble creditor community. Although, the Nordic Trustee is in charge of the active management of the bond issue, the bondholders may nonetheless instruct the Nordic Trustee through decisions by a certain percentage of bondholders.(13) Cl. 15 of the Nordic Trustee’s standard bond terms (n 6)
Of specific interest to this article is the no-action clause contained in the term sheet(14) Refer to the ‘Bond Terms’ section in the Nordic Trustee’s standard term sheet (n 14) and the bond terms. This clause prohibits each individual bondholder from taking legal or enforcement action against the issuer, and is set out in cl. 3.2 (a) of the bond terms:
No Bondholder is entitled to take any enforcement action, instigate any insolvency procedures, or take other action against the Issuer or any other party in relation to any of the liabilities of the Issuer or any other party under or in connection with the Finance Documents, other than through the Bond Trustee and in accordance with these Bond Terms, provided, however, that the Bondholders shall not be restricted from exercising any of their individual rights derived from these Bond Terms, including the right to exercise the Put Option.(15) Clause 10.3 of the Nordic Trustee’s standard bond terms (n 6) sets out the bondholders’ “Put Option”; whereby each bondholder, upon certain defined events (i.e. change of control), has the right to require that the issuer purchases all or some of the bonds held by that bondholder at a price equal to X per cent of the nominal amount.
Concurrently, the Nordic Trustee’s right of action is expressly set out in cl. 16.1 (a), which reads:
The Bond Trustee has power and authority to act on behalf of, and/or represent, the Bondholders in all matters, including but not limited to taking any legal or other action, including enforcement of these Bond Terms, and the commencement of bankruptcy or other insolvency proceedings against the Issuer, or others.
Thus, the contractual arrangement between the Nordic Trustee, the bondholders and the issuer is clear. No individual bondholder may take legal or enforcement action against the issuer. Any and all actions shall be taken by the Nordic Trustee.(16) This article does not discuss either the functionality of the no-action clause or the lack of incentive on the part of the bond trustee to act upon an event of default. The bond trustee is normally paid an annual fee and does not receive additional compensation if the bond issue requires substantial administration. However, the trustee is entitled to an indemnity covering expenses and certain liabilities etc. For an in-depth analysis of these issues, see Marcel Kahan, ‘Rethinking Corporate Bonds: The Trade Off between Individual and Collective Rights’ 77 New York University Law Review 1040-1058.
Originally, the no-action clause was included to protect the issuer against frivolous and multiple lawsuits from individual bondholders.(17)Elektrim S.A. v Vivendi Holdings 1 Corp and Law Debenture Trust Corporation PLC [2008] EWCA Civ 1178 [4] Such lawsuits may potentially trigger cross default provisions contained in the financial agreements of the issuer, which may in turn have a detrimental effect on the issuer. These lawsuits might be filed in parallel in various jurisdictions, resulting in substantial costs on the part of the issuer attempting to fight off such lawsuits. Some investors even specialise in acquiring distressed debt to threaten the issuer with bankruptcy, in order to make a tidy profit when the other creditors eventually cave in and a restructuring agreement or the like is reached. If individual actions were permitted, the assets of the issuer could diminish at the expense of the issuer and the overall class of bondholders.(18) ibid Furthermore, the no-action clause may protect the bondholders from repeated individual requests for amendments or waivers by the issuer. More importantly, the contractual agreement ensures a cost-effective method of enforcement if and when necessary.(19) Letter from the Nordic Trustee to the Ministry of Finance dated 27 October 2009 (n 12) Enforcement actions by the bond trustee further secures any proceeds being shared pari passu.
The introduction of the bond trusteeship in Norway is founded upon the underlying assumption that the Nordic Trustee may sue and be sued in its own name. As this article explores in section 3, that assumption was flawed according to pre-2010 case law. Consequently, a severe level of insecurity arose in the Norwegian market in 2009 after the District Court(20) Ruling of 15 April 2009 by Oslo District Court (Nw. ‘Byfogden’) (TOBYF-2009-44929). Note that (almost) no ruling of the District Court or the Court of Appeal includes numbered paragraphs or page numbers. and the Court of Appeal(21) Ruling of 30 September 2009 by Borgarting Court of Appeal (LB-2009-96441) ruled that the Nordic Trustee did not have title to sue in its own name.
To the contrary, both English and US courts have interpreted the no-action clause as covering both contractual and non-contractual claims,(22) See for instance Elektrim S.A. v Vivendi Holdings 1 Corp and Law Debenture Trust Corporation PLC [2008] EWCA Civ 1178 [101] and Feldbaum v. McCrory, 1992 WL 119095 *6 (Del.Ch. June 2, 1992). thereby vesting the bond trustee with powers to sue in its own name on behalf of the bondholders in contract and tort.(23) Note that, in the US, an individual bondholder may sue the issuer for payment of overdue principal and interest on the bonds, ref. the US Trust Indenture Act, 15 U.S.C. § 77ppp(b). This right is supplemental to the bond trustee’s right of action, see §§ 77aaa-77bbbb. In these jurisdictions, the bond trustee’s right to sue on behalf of the bondholders is undisputed, and there is also an example from the US where the bond trustee was sued in its own name concerning actions performed in its capacity as bond trustee.(24) See for instance Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., N.A 773 F.3d 110 and Phillip R. Wood, Principles of International Insolvency (Sweet & Maxwell 2007) 12-046. See also § 308 of the US Uniform Statutory Trust Entity Act, adopted by inter alia D.C. Law 18-378. District of Columbia Official Code Title 29 (Business Organizations) Enactment Act of 2009 s. § 29–1203.08: “A statutory trust may sue and be sued in its own name.” The UK and US perspective will be subject to further analysis and comparison in section 6 below, after the legal battle of the Nordic Trustee, to establish its right to sue in its own name, has been thoroughly analysed in section 4. However, pre-2010 case law and the abovementioned rulings of the lower courts showed that the no-action clause would fail, unless the Supreme Court made an exception to the main rule pertaining to a representative’s lack of title to sue in its own name.