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Is there now a definition for “fair market value” in the context of the Global Master Repurchase Agreement 2000 edition?

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Is there now a definition for "fair market value" in the context of the Global Master Repurchase Agreement 2000 edition?

In a claim brought by LBI EHF (formerly Landsbanki Islands hf) (“LBI“) relating to repurchase (or “repo”) transactions against Raiffeisen Zentral Bank Österreich AG (now Raiffeisen Bank International AG) (“RZB“), the Court of Appeal has ruled on the meaning of the words “fair market value” in the default valuation provisions in the Global Master Repurchase Agreement 2000 edition (the “GMRA“).

Following on from the recent decision in Lehman Brothers International (Europe) v Exxonmobil Financial Services BV[1](which also involved the 2000 edition of the GMRA), the Court of Appeal has avoided limiting the wide discretion given to the non-Defaulting Party when determining “fair market value” under the GMRA, particularly in distressed markets.

Background

In October 2008, at the time of LBI’s collapse, there were 11 open positions between it and RZB relating to repo trades which were on the terms of the GMRA.

The failure and insolvency of LBI constituted an Event of Default under paragraph 10 of the GMRA.  In short, the terms of the GMRA required LBI (as the Defaulting Party) to pay RZB (as the non-Defaulting Party) the agreed Repurchase Price for the securities minus the Default Market Value of Equivalent Securities.  The methods of valuation provided for under the GMRA depended upon whether the non-Defaulting Party had served a Default Valuation Notice by the Default Valuation Time.

In this case, RZB had not served a Default Valuation Notice by the Default Valuation Time.  In this circumstance, the GMRA required RZB to determine the “fair market value” of the relevant Equivalent Securities.  Paragraph 10(e)(ii) of the GMRA provided:

…the Default Market Value of the relevant Equivalent Securities…shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities…in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities…which is commercially reasonable, the Default Market Value of such Equivalent Securities…shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practical after the Default Valuation Time“.

“Net Value” was defined in paragraph 10(d)(vi) of the GMRA as meaning “…the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods…as the non-Defaulting Party considers appropriate…“.

Crucial to this definition of “Net Value” was what factors the non-Defaulting Party may take into consideration when determining the “fair market value” of the Equivalent Securities.  The Default Valuation Time for the securities in question in this case was 15 October 2008, the height of the financial crisis and a time of extreme distress in the markets.  The question of whether or not the distress in the markets could be taken into consideration, therefore, was of critical importance.

The decision at first instance

It was common ground, by the end of the trial, that RZB had not carried out the correct valuation process. This meant the court had to consider a counter-factual question as to what Default Market Value RZB would have arrived at if it had acted in accordance with the GMRA.  As such, the primary issue that the court had to consider was the meaning of “fair market value” in the GMRA.

It was argued by LBI that the words “fair market value” should carry the meaning attributed to them in a variety of other legal and financial contexts, both domestically and internationally.  LBI argued that these other definitions showed that there was a consistently recognised concept associated with “fair market value” involving a willing buyer, a willing seller, knowledge of the asset in question and a lack of compulsion.  The “lack of compulsion” element was central to LBI’s argument.  This, it submitted, excluded prices achieved in a distressed market.  However, the court found this argument “difficult to reconcile with the fact that under paragraph 10(e)(i) of GMRA the non-Defaulting Party may actually sell the securities, in what may be a distressed market, and determine the Default Market Value on the basis of the prices obtained, provided always that it acts in good faith“.

On the basis of the judgment in Socimer Bank Ltd v Standard Bank Ltd[2], LBI accepted that the task for the court was to put itself in the shoes of the decision maker and ask what decision it would have reached, acting rationally and not arbitrarily or perversely.

In Exxonmobil, it was held that the securities should be ascribed a fair market value in accordance with the opinion which the non-Defaulting Party (acting rationally) would have formed if it had conducted the valuation exercise required by paragraph 10(e)(ii).  This was largely a question of fact.

At the point of the written closing submissions, RZB provided what it thought was the “fair market value” for each of the bonds as at 15 October 2008, and the information that it had used to arrive at that value.  The court acknowledged that the information available in this case was “imperfect”, but “the circumstances at that time were imperfect“, and “[a]ny assessment of fair market value would have been imperfect but the non-Defaulting Party was nonetheless entitled to make one“.  Accordingly, at first instance, it was accepted that the figures provided by RZB met the requirement “for a rational, honest determination of fair market value as at 15 October 2008“.

The appeal

The appeal concerned whether, on the true construction of the GMRA, the non-Defaulting Party’s assessment of “fair market value” of securities could be based on prices achieved or quotations obtained in a distressed or illiquid market.

LBI submitted that the words “fair market value” in the definition of “Net Value” required the non-Defaulting Party to assess the price from the perspective of a willing buyer and a willing seller, neither being under any particular compulsion to trade.  Such an assessment should not therefore reflect liquidity issues or distress that happen to feature in a particular market at a particular time.

LBI submitted that this would be consistent with the meaning attributed to “fair market value” (albeit in different contexts) in authorities from Australia and Canada. However, the Court of Appeal concluded that these cases were of no real assistance as they involved different factual contexts; the meaning of “fair market value” in the present case had to be “determined as a matter of construction of this particular contract in its particular context[3].  Accordingly, the correct starting point when determining the meaning of “fair market value” was to consider the definition of “Net Value”.

Instead, it was held that the meaning ascribed to the words “fair market value” by LBI was not one which was to be found in the express terms of the GMRA.  Furthermore, there was no basis for it to be implied, because it was”contrary to the express language of the GMRA and, in particular, the wide discretion conferred on the non-Defaulting Party“.

LBI’s appeal was dismissed and the Court of Appeal concluded that the wording of the GMRA “entitled the non-Defaulting Party to have regard to any evidence and information as to the particular market at the particular time” (as held by Knowles J).  Similarly, there was “no warrant for limiting the width of the discretion provided by the contract wording by requiring the non-Defaulting Party to disregard the evidence of the market merely because it was illiquid or distressed at the particular time“.

Implications

The English courts have resisted setting out an interpretation or definition of “fair market value”. The risk of doing so would be to restrict what, under the GMRA, is a wide discretion given to the non-Defaulting Party to assess the “fair market value” of the Equivalent Securities by reference to “such pricing sources and methods…as the non-Defaulting Party considers appropriate“.  Furthermore, a tailor-made definition of “fair market value” to fit the facts of this case would have been inappropriate, because the GMRA was used in respect of a wide variety of financial instruments.

This case confirms that a non-Defaulting Party is given a wide discretion in reaching a determination on “fair market value”, particularly in distressed situations.  In the absence of an express or implied term in the GMRA on the exercise of discretion, as a matter of principle, the only limitation when determining “fair market value” will be the one recognised in Socimer, that the decision-maker “must have acted rationally and not arbitrarily or perversely“.

Parties who are trying to value securities in a distressed or illiquid market should derive some comfort from this judgment.  However, what the meaning of “fair market value” is will be determined as a matter of construction of the particular contract in its particular context.

Abdulali Jiwaji is a Partner at Signature Litigation.

Harry Denlegh-Maxwell is an Associate at Signature Litigation.

Johnny Shearman is Professional Support Lawyer at Signature Litigation.

[1] [2016] EWHC 2699 (Comm)

[2] [2008] EWCA Civ 116

[3]Per Longmore LJ in Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302; [2014] 2 Lloyd’s Rep 59

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Voice Quality Matters: Quarter of Employees Working From Home Still Experiencing Regular Connectivity Issues

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Voice Quality Matters: Quarter of Employees Working From Home Still Experiencing Regular Connectivity Issues 1

-Survey of 1007 SMEs in the UK by Spitfire Network Services Ltd reveals pain points for employees working from home-

-27% experience frequent or occasional connectivity disruptions despite working remotely since March-

-Only 4% of employees working from home have a dedicated Internet connection for work-related purposes-

Spitfire Network Services Ltd, a provider of telecoms and IP engineering solutions to UK businesses, today revealed data that showed more than a quarter of employees experience regular issues with connectivity whilst working from home. The ‘Voice Quality Matters’ survey found that 27% of employees faced connectivity challenges such as drop-outs or lags during the course of their working day, causing frequent disruption and impacting on productivity. With the majority of voice (video) communications hosted via the Internet, the importance of ensuring your voice can be heard has never mattered more.

The survey revealed that only 4% of employees working from home had their own dedicated internet connection for work purposes. Instead, employees are relying on their home broadband for connectivity. When asked, 57% of employees revealed that they had between 3-10 devices connected to their home broadband at any one time.

Employees were also asked about the time of the day that most of the issues occurred, 4pm-6pm was revealed to be the problem hours. With kids returning from school and using personal devices, the strain on the network resulted in connectivity problems arising.

Dominic Norton, Sales Director, Spitfire Network Services Ltd, commented on the findings: “We were unsurprised to discover that more than one in four employees are facing connectivity challenges whilst they work from home. When you consider that remote working can no longer be classed as the supposed ‘new normal’ with this shift happening over 9-months ago, it shows that businesses have been slow to act. Connectivity is critical for employees to mirror the experience of the office from home – critical for delivering a service to customers and ensuring their workforce is as productive as possible. My message to businesses would be to act now and really consider the damage that may be being caused to both productivity and reputation.”

In total, 1007 respondents were surveyed throughout November 2020 as part of the Voice Quality Matters survey conducted by Spitfire Network Services Ltd.

For more information about Spitfire Network Services Ltd, visit www.spitfire.co.uk.

To find out how we can support your customers to ensure they stay connected, please contact [email protected].

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How can we benefit from mandated e-invoicing?

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How can we benefit from mandated e-invoicing? 2

By Mark Stephens, the CEO of Blackstar Capital

Electronic invoicing is at a tipping point. On the one hand, only a small minority of invoices that are sent globally are e-invoices. It is estimated that 75% of the world invoices are still transacted on paper, and those that rely on email instead experience similar inefficiencies. On the other, a recent trend of B2G mandates from governments around the world could potentially serve as a catalyst for a new wave of public and private sector e-invoicing adoption.

In India, for example, the Central Board of Indirect Taxes and Customs has regulated that e-invoicing will be mandatorily adopted by all companies with a turnover exceeding INR 500 crore. The decision follows many countries in Latin America, most notably Brazil and Mexico, where electronic invoices have been mandated as the only acceptable standard for all significant public and private commercial transactions.

In Latin America, these systems are largely being used as a tool to improve the government’s fiscal control and recapture lost tax revenue from economies with high rates of cash transactions. Brazil, Chile and Mexico have all adopted a ‘clearance model,’ where before invoices are sent, they are cleared by a government portal. Documents are therefore tax-compliant in real-time, reducing delays and fines, while significantly reducing tax leakage. India’s model is broadly similar to this, and the EU is also looking towards adopting something similar to the clearance model.

In 2019, all VAT-registered businesses in Italy started issuing invoices electronically using the country’s online exchange system. The decision in Italy, like many others, was again driven by tax efficiency. While these mandated government decisions can help achieve this, experts say the benefits of e-invoicing actually go well beyond this and it is time the arguments for mandating e-invoicing include the benefits for small, medium and global businesses too. The EU has been clear: mandated e-invoicing has the potential to not only save government processing costs, but also provide the stimulus for private sector adoption that can drive the environmental, cost, and efficiency benefits.

For businesses, the potential benefits are huge. Companies on average able to save between 50-70% of processing costs and 65% of invoice processing time. E-invoicing reduces errors, fraud and human intervention. A Wax Digital study found about 25% of time handling paper invoices is spent on resolving problems related to data entry and processing. As there are roughly 16 billion B2B invoices processed each year in Europe alone, Deutsche Bank projected that full adoption could lead to an annual saving of at least €260 billion. Organisations already using e-invoicing have been motivated to do so because of this huge cost efficiency aspect.

Mark Stephens

Mark Stephens

In the most recent Spring Statement, the Chancellor of the Exchequer described late payments as a ‘scourge’ and according to Siemens Financial Services, SMEs in the UK are missing out on over £250bn of working capital cash flow due to late payments. Xero found that businesses which use online tools get paid 33% faster than those which use paper invoices. Faster approval cycles result in better cash flow, which can be passed down the supply chain in cost and time savings. Finally, a mandated move from paper to paperless could have a huge impact on the global carbon footprint.

In addition to the impact that the reduction of late payments can have on the working capital of businesses globally, e-invoicing can provide a more efficient avenue for the funding of invoices.  Invoice financing is not new, but the level of transparency and depth of data accessible via modern e-invoicing platforms enable direct access for financiers to provide faster, efficient, de-risked, and innovative funding solutions in relation to the financing of such invoices. There is a growing belief that this will have a fundamental, evolutionary impact on the invoice financing space.

Public sector mandated e-invoicing therefore can be expected to drive private sector e-invoicing adoption and provide the gateway for the digitisation of many business processes. The blueprint for adoption was Denmark’s pioneering 2005 legislation that allowed vendors to submit invoices online, free of charge, using a SaaS service. The Danish were focused on the economic benefits of e-invoicing and decided the best way to influence behaviour would be to keep the barriers to entry as low as possible. By offering a free and open service, Denmark was able to voluntarily achieve the long-term commercial adoption of B2B e-invoicing in the private sector after mandating public sector B2G e-invoicing.

Now with the challenges of Covid-19, global governments will be more focused than ever on cost efficiencies and the need to guarantee tax revenues. Mandating e-invoicing, however, can also have huge knock-on benefits for the wider B2B business market. With a higher adoption rate across the private sector, mandating e-invoicing will provide huge cost and efficiency savings for businesses at a time when public and private finances are under significant pressure.

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How fintech companies can facilitate continued growth

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Fintech M&A: the terrible teens?

By Jackson Lee, VP Corporate Development from Colt Data Centre Services

The fintech industry is rapidly growing and, in the first half of 2020, fintechs have secured more than $25 billion in investment globally, despite the huge uncertainty caused by COVID-19. As fintechs and their customer base expand, it is important to recognise that the success of these companies is predicated on the ability to use data effectively in providing a personalised experience to their customers.

To ensure these companies do not become victim of their own success, they must ensure they have the ability to scale up their operations and data storage as quickly and cost-efficiently as possible, especially in these challenging times.

So what must fintech companies do if they are to facilitate this growth without bursting at the seams?

Big fish in a small pond

Fintech companies are growing exponentially, and for many, even the current uncertainty around the pandemic has not decelerated the pace of their growth. However, having started small – with only having access to limited tools at the beginning of their journey, many fintech companies can’t keep up with their own rapid growth. When it comes to data infrastructures, they are facing a real risk of becoming a big fish in a small pond.

In order to achieve widespread innovation, and to keep their advantage over traditional financial institutions, fintech companies need the necessary playground space to experiment in.

When the pandemic and its consequent disruptions started to take hold, most businesses weren’t prepared for the types of challenges that they would have to face. Although the suggestion of investing in data infrastructure might seem counter intuitive at the moment, a lifeline for fintech companies going forward will be flexibility and the ability to scale.

Risky business? 

As the uncertainty around the pandemic continues, fintech companies, like other industries are finding it difficult to commit to long-term business plans. Despite their continued growth, fintech companies continue to be cautious to invest in expanding their operations during an unpredictable economic climate, especially when they are doing well enough as it is.

Even before the pandemic, fintech companies exhibited slower rates of the adoption of digitalisation and advanced IT infrastructures than other industries. It’s clear the future is digital and for fintechs to effectively compete in today’s volatile market, they need to be proactive and invest in the value of data and digital transformation.

One area that fintech companies must be proactive in is their IT infrastructure, especially their data storage and connectivity, in order to allow them to act faster than big, established competitors.

Limitless scalability

Due to the continuous growth of fintech companies, with no sign for it to slow down, these companies will have to continually scale their operations up to manage increased demand. Ordinarily, this would have very high costs as they would have to continually alter their IT infrastructure and solutions.

When it comes to flexibility, data is a crucial aspect for fintechs. In today’s world, companies store masses of data, and its amount is growing fast. This makes the storing of the data a juggling act, and the costs keep growing with it. In periods of economic uncertainty, such as the one we are experiencing now, this constant increase in data can quickly turn into a challenge. Therefore, fintechs must ensure that scalability is at the heart of everything they do. When it comes to scalability, however, the key factor is not just growth or the ability to scale up. A vital, but often overlooked opportunity in scalability lies in scaling down, when needed. For fintechs aiming at this level of scalability, hyperscale is the only way forward.

The answer is hyperscale

Hyperscale data centres provide businesses with a one-stop shop for all their data and capacity requirements. These centres, which are built in a campus-style design, allow companies to build out further data centres quickly within the same location, or if needed, downsize. In an environment of ever-fluctuating demand, hyperscale enables scalability of data and storage swiftly. This presents many benefits. The sheer size of these facilities allows for large-scale cloud adoption, which is more streamlined, flexible and cost-effective than ever before. This will help fintechs to get a better handle on their data and reduce costs as much as possible.

With this level of scalability, companies can operate like an elastic band, expanding or retracting when necessary and at a moment’s notice. For example, imagine this year’s Christmas. With the uncertainty of the pandemic and constantly changing restrictions, people’s online activity will be even higher than in previous years. Fintechs will have to scale up their operations to cope with the high demand of online services. Meanwhile, when demand goes down in January, it might be beneficial to scale down and reduce costs until demand increases again.

Hyperscale will also help fintech companies to future-proof their operations, which has become a key consideration as the economy looks to recover from the pandemic. By having the level of flexibility that hyperscale provides, businesses will always have the ability to lean or expand. Being able to adjust quickly within the hyperscale environment, with no added costs, makes fintechs more resilient and flexible to disruptions.

While cutting costs will continue to be a priority in today’s business environment, it is important that fintech companies look beyond this and focus on innovation and technology. The issues that the pandemic unearthed already existed and needed to be addressed by businesses. Therefore, they need to take the current situation as an opportunity to reconsider and improve their business models. Flexibility, scalability and cost efficiency must be top priorities in this new era. Hyperscale can provide this trinity of success.

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