M&A Diligence: does any obligation of good faith extend to making amendments to loan notes?
Although an implied duty to act in good faith has recently found traction in certain contractual cases, the recent case of Myers and another v Kestrel… Read more
Although an implied duty to act in good faith has recently found traction in certain contractual cases, the recent case of Myers and another v Kestrel Acquisitions Ltd and others  EWHC 916 serves to highlight its limits. In the Myers case, the High Court confirmed no term of good faith should be implied into the wide power given to the issuer of loan notes to modify the terms of those notes.
The facts of the case were that the claimants had sold their shares in a target company to Kestrel Acquisitions Limited (Kestrel) for cash and fixed rate loan notes issued by Kestrel (the Consideration Loan Notes). To fund the acquisition, a separate set of loan notes, created by a separate instrument (the Investment Loan Notes), had been issued to investors in Kestrel.
The Consideration Loan Notes allowed Kestrel to “make any modification” to the Consideration Loan Notes if approved by the holders of the Consideration Loan Notes or unilaterally, if the amendment was consistent with changes made to the Investment Loan Notes. After the issue of the Consideration Loan Notes, certain amendments were made postponing the repayment date by eight years to 2018, and the claimants argued that this went beyond the scope of the permitted modification, was subject to an implied obligation of good faith and should have been made for the benefit of the holders of the Consideration Loan notes and Investment Loan Notes as a whole, taking them together as a single class.
The court disagreed. The judge was unwilling to imply a duty of good faith for a number of reasons, including that the holders of each type of loan note could not be taken as a single class and so there was no requirement for the majority (the holders of the Investment Loan Notes) to act in the interests of the holders of the Consideration Loan Notes; in fact a clause in the instrument issuing the Consideration Loan Notes requiring Kestrel to treat the holders of the Investment Loan Notes in the same manner as if members of a single class in certain circumstances, implied that they should not be treated as members of the same class in all purposes.
The judge also considered that, taking into account previous case law on the amendment of corporate loan stock instruments: “in each case amendments providing for a sub-ordination of the indebtedness (secured or unsecured) or a postponement of its redemption have been held to be a permissible modification of rights.”
Whilst we are seeing a line of recent cases where the courts are open to either upholding an express provision to act in good faith (for example, Copass Group UK and Ireland Limited (t/a Medirest) v Mid Essex Hospital Services NHS Trust  All ER (D) 200 (Mar)) or even implying a general duty of good faith (from Yam Seng Pte Limited v International trade Corporation Limited  EWHC 111 to D&G Cars Limited v Essex Police Authority  EWHC 226 – also reported on in this month’s KL Business Bytes), the Myers case shows that the courts are still primarily concerned with upholding the parties’ intentions by looking at the drafting of any document on its face.
For more information, please contact Andy Moseby, Corporate Partner