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(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.
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, 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 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“. 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“.
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.
  EWHC 2699 (Comm)
  EWCA Civ 116
Per Longmore LJ in Barclays Bank plc v Unicredit Bank AG  EWCA Civ 302;  2 Lloyd’s Rep 59
Research exposes the £68.8 billion opportunity for UK retailers
- Modelling shows increasing the proportion of online sales by 5 percentage points would have significantly boosted retailers’ revenues during the first lockdown
- 72% of Brits want retailers who started an online service during the pandemic to continue operating it full time
New data released today by global payments platform Adyen, outlines the economic gains that could be accessed by getting more UK retailers online.
Economic modelling conducted by Cebr for Adyen indicates that if the retail sector increased the proportion of turnover stemming from online channels by 5 percentage points, £68.8 billion would have been added to the economy during the first lockdown.
While retail turnover stemming from online sales has grown significantly during 2020 – from 19% to 28%, there is still considerable room for growth.
Myles Dawson, UK Managing Director of Adyen comments: “The UK retail sector is facing an incredibly tough quarter, so creating the link between physical stores and online channels is more important than ever. With the festive period approaching and many shoppers unable, or uncomfortable leaving their homes, establishing and maintaining a positive online experience is a billion-pound opportunity for retailers.”
The research of 2,000 UK consumers found that 31% are less likely to shop in physical stores now because of positive experiences shopping online during the pandemic. Furthermore, 72% of these consumers want retailers who started an online service during the pandemic to continue operating it in the long term.
However, making the process of shopping online as frictionless as possible will be key to unlocking the opportunity presented by online channels. 70% of Brits say that when shopping online, the ease of use is as important as the quality of the product, and 72% won’t shop with a retailer whose website or app is difficult to navigate.
Myles Dawson concludes: “Many retailers did amazing things during the pandemic in terms of adapting and creating new experiences – it’s a testimony to their agility that 57% of Brits said their expectations of the retail sector has improved during the pandemic. The challenge now is to consistently meet these expectations going forward. With local lockdowns in place, online channels will be key to serving many consumers in the short term. However, retailers need to see the shift to unified commerce as a long-term trend. The sooner they can demonstrate agility and jump on board, the longer they’ll reap the rewards.”
2 Research conducted by Opinium Research LLP
Want to serve your customers better? An effective online strategy is what financial institutions need
By Anna Willems, Marketing Director, Mention
A strong online presence matters.
Having a strong online presence, that involves social media is now a crucial part of all business strategies. Whether they are retail brands, sports teams, libraries or even restaurants, most companies are investing more and more in developing their digital brand image and online presence – financial institutions are no exception.
When it comes to market trends and innovation, financial institutions are first on the line. After all, we — people and companies — trust them to manage our money to the best of their abilities. And even more so than any other market, we demand secure, trustworthy, fast and user-friendly services.
Reaching such high expectations is not a given. To this point, banks and other financial institutions have no other choice but to have a perfect understanding of their market, their audience, and their needs. What they need to get there is a fail-proof online strategy.
Gaining a deep understanding of your market
One of the best things about using social media to learn about your audience is that people give unsolicited opinions. They speak their mind and share their thoughts candidly.
This is the key to help any business to learn about themselves. They get to analyze their audience’s challenges and aspirations without having to ask them directly or serve them time-consuming surveys and polls.
UK-based Asto, a company that is part of the Santander Group, is committed to helping small businesses have access to financial and non-financial tools. Asto was looking for something that could help them discover what their target audience was talking about and find opportunities to add to the conversation. Mention enabled Asto to keep on top of reviews and customer comments, which has helped us provide a better service for our customers.
Which platform suits your offering the best?
There’s no point choosing to create campaigns on TikTok if your customers don’t use it – you need to think about who they are and work back from there.
You do this by automating the process using a social listening tool. A social listening tool will help you to view your market as a whole and identify where the key conversations are happening — and, therefore, where you should be. What’s more, you will never miss any relevant mention of your institutions, products, services, or competitors.
Handling a crisis
Financial institutions need to watch carefully for negative press – social media is the first place people will go to if they feel they’re not getting the service they need. In theory, rogue employees or unhappy clients can post anything they like online to try and hurt your brand. And if their messages gain traction, you’ve gone from one person saying bad things, to thousands.
That’s why listening needs to be part of any crisis management plan. Now, sometimes, there are crises you cannot prevent. And those usually hit pretty hard.
Power of influencers
For an influencer marketing campaign to work for your financial institution, partnering with nano content creators may well be the best way to go. They’re ability to play a part in how they shape your brand story can make a huge difference when it comes to engagement and reason to believe in your service.
Many financial institutions are already leveraging influencer marketing. It’s an efficient strategy to: Build trust and gain credibility, reach out to new audiences and share engaging stories.
The online review conundrum
94% of consumers check online reviews before they decide to buy something or subscribe to a service. They need what we call social proof. It says that the more people say they use your service, the more it will look like a good service. In short, you need to show how happy people are using your service. But not all online reviews are positive.
Having said that, we find that financial institutions shouldn’t ignore negative reviews. Instead, embrace them as an opportunity to rebuild trust in your brand. Less delicately put, take the bull by the horns and turn them to your advantage. Always respond to relevant complaints (and as fast as possible). Take responsibility for what happened. Be helpful.
And ignore trolls.
Learn from the competition
Over the last two decades, a marketer’s daily life has greatly evolved. Most importantly, we now can measure everything we do, including the consequences of our actions on our business. Having said that, you can’t evaluate how well you’re doing without comparing against
Truth is that 77% of businesses rely on listening to keep an eye on their competitors. What this means is that 4 in 5 of your direct competitors are likely watching each and every single step you take. And you should do the same.
Setting the trend
From staying up to date with the latest industry trends and innovations, to keeping an eye on the competitors’ newest services, to being the first to know of potential brand crises – tracking relevant online conversations lets marketing and communication professionals working for financial institutions to stay one step ahead in an industry that is leading change and innovation.
Why the Boom is Long Overdue (and Here to Stay)
By Roger James Hamilton, CEO, Genius Group
Virtually every aspect of our lives has been taken over by tech, so why is it that our schools, that are educating the business leaders of tomorrow, are still operating in much the same format as they did 100 years ago?
The global pandemic put digital learning in the spotlight and an Edtech boom has ensued, with companies like Coursera, Quizlet and Udemy seeing unicorn style growth. And the market is not slowing down. The education technology (Edtech) boom will continue.
Resilience and Growth
Unicorns are defined by rapid growth. Traditionally, these companies are not overly concerned with early profitability, long-term sustainability or value creation as much as with putting their competitors out of business.
But something different is going on in the Edtech market. The unicorn has lost its appeal. When learning platform Quizlet achieved unicorn status this year, CEO Matthew Glotzbach was keen to play down the moniker reserved for start-ups valued at $1 billion or more, preferring to liken his company to a camel.
Unlike unicorns, camels are real, hardworking beasts. Respected for their adaptability to various climates, resilience, and abilities to survive for long periods without sustenance. These are all traits much better suited to weather the economic storms created by the pandemic.
Despite their considerable abilities to adapt to challenging conditions, the climate is looking particularly sunny for camels within the Edtech market. In fact, all creatures great and small have the potential to capitalise on unprecedented growth in this sector.
The nature of education makes it a traditionally slow-moving area, which renders it unattractive to some investors. Yet, the coronavirus outbreak and subsequent surge in remote learning this year triggered a flurry of uptake in e-learning platforms.
We’ve seen the adoption rate for new technologies be accelerated by events like this before. For example, the SARS crisis of 2003 contributed to the boom in China’s ecommerce industry, as quarantines lead consumers to shop online. Of course, this market trend did not slow down once quarantine restrictions were lifted. Ever since, global online sales have risen exponentially. The same is set to happen in the Edtech market.
Providing a Solution
As with ecommerce in 2003, the demand for Edtech in 2020 was already there. It has been there for years. For the past decade at least, there has been a notable need in recruitment for qualified talent in data science, coding and digital. Edtech can bridge the skills gap, not only within formal education but also for adult learners upskilling and reskilling for today’s digital world.
Similarly, the financial crash of 2008 had the effect of fast-tracking the rise of the gig economy, requiring millions more to learn entrepreneurial skills. The idea of a job for life is now a distant memory. The Edtech sector can deliver the tools to equip students of all ages with the skills necessary for creating their own opportunities, as well as exchanging knowledge and collaborating in a digital economy.
Rising unemployment, as well as competition for jobs and government furlough schemes has seen interest in digital learning courses for adults also soar during the past few months. Figures show that the corporate e-learning market is set to increase by as much as $3.09 billion between 2020 and 2024.
The Edtech boom kickstarted by the pandemic is just the beginning in a paradigm shift in how we view education and work.
Over the next 10 years, with the rise of artificial intelligence, automated technology, and augmented reality, traditional, manual and customer service based roles will diminish and there will be less need for a large workforce when computers and machines can do the role equally well.
The need for a truly 21st century education system that reflects the needs of the job market is long overdue. Edtech companies are offering solutions to many of these issues that have troubled the economy for the past decade or more.
A Different Animal
Enter the zebra (back to our animal analogies). These types of Edtech businesses will be the ones to watch within the sector. With zebra companies, there’s a sense of community and collaboration, rather than competition. They understand that there’s room for more than one superstar in a market. Zebras are herd animals after all. The zebra believes that competition is healthy for everyone involved—something to watch and use for motivation and growth. It closely observes consumer trends and continually strives to solve new and developing problems for those consumers.
For zebra companies, profit margin is vital because it is necessary for steady growth and sustainability. Revenues hover between $5M and $50M, it serves customers within a specific niche, requires annual growth capital of $100K to $1M, and generally has more than four streams of revenue.
Zebras are both black with white stripes and white with black stripes – they have a fluidity in their approach and are camouflaged at the same time. This creates a double bottom line: Zebras want to conduct real business, by solving a pressing problem in a sustainable way, whilst reacting to contemporary challenges. This too could be said of the Edtech industry as a whole.
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