High Court judgment on the LIBOR transition

A divisional court yesterday handed down an important decision on the LIBOR transition, following an expedited trial in the Financial List: [2024] EWHC 2605 (Comm).

The case concerned a series of preference shares issued by Standard Chartered. The shares had a fixed-rate dividend until 2017 and thereafter a floating-rate dividend of 1.51% plus three-month USD LIBOR. The question was what should happen now that LIBOR has ceased to be published.

Standard Chartered argued that the reference to LIBOR should be construed as a reference to a rate that effectively replicates or replaces LIBOR. That rate was synthetic LIBOR, a rate that the FCA had prescribed as a temporary replacement for LIBOR, and which the FCA had described as a “fair and reasonable approximation of what LIBOR might have been had it continued to exist”.

Alternatively, Standard Chartered sought an implied term that it could use a reasonable alternative rate in place of LIBOR. The experts agreed that the best alternative rate was three-month CME Term SOFR plus the ISDA spread adjustment of 0.26161%. That rate is the same as was used to calculate synthetic LIBOR.

The claim was opposed by two US hedge funds, who sought a different implied term. They argued that, once LIBOR had ceased, the preference shares would have to be redeemed, because no alternative rate could serve the same purpose as LIBOR. One difficulty with this argument was that legal and regulatory restrictions on redeeming shares could, in principle, delay any redemption.

The hedge funds proposed that a fixed-rate dividend could be paid in the interim.

Flaux C and Foxton J accepted the implied term sought by Standard Chartered. Since the Preference Shares were, in principle, perpetual securities, there needed to be another way to determine a floating rate in place of LIBOR. The Court also accepted that, as matters stand, the alternative rate identified by the experts was the ‘reasonable alternative rate’.

The Court held that the implied term sought by the hedge funds was wholly untenable. It would require capital to be withdrawn early, when the Preference Shares were intended to be long-term capital, with a right of redemption only at the option of Standard Chartered and subject to regulatory approval.

The Court also commented that the effect on debt instruments, where the reference to LIBOR was a non-essential term, would be similar. Such instruments would therefore not be due early, but would continue with an alternative rate.

3VB’s Anthony Pavlovich acted for Standard Chartered. He was led by Kenneth MacLean KC and Andrew Thornton KC and was instructed by Peter Wickham, Olga Ladrowska and Lily Pinder of Slaughter and May.

3VB’s Lisa Lacob (instructed by Jones Day) acted for the First Defendant which did not take a position on the main issue in the proceedings. Lisa has written a note analysing the judgment and the extent to which it has wider ramifications than the case at hand. Lisa’s note appears here: Standard Chartered Plc v Guaranty Nominees Limited and Ors.

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