6 ASIAN LEGAL BUSINESS – JUNE 2023 WWW.LEGALBUSINESSONLINE.COM BRI EFS Credit Suisse (CS) might be no more after it was forced into the arms of rival UBS, but the legal backlash arising from the government-orchestrated deal is just gathering storm. With investors worldwide (including in Asia) decrying the Swiss authorities for evaporating billions of dollars in additional tier one (AT1) bonds, law firms are gearing up for protracted legal battles. But first, a bit of background. CS met its sudden demise in March, as mounting fears for the troubled Swiss lender’s liquidity essentially penned a swift end to its 167-year history. This episode not only put regulators on heightened alert, but also introduced a fresh slew of legal questions facing the Swiss authorities. In a bid to preserve the golden brand of Swiss banking, the Swiss government swooped in to orchestrate a shotgun marriage between CS and its local rival, UBS, hoping to smother a wider financial crisis of global implications reminiscent of 2008. Some level of confidence seemed to have been restored, and the global banking system is still standing. But the government’s bold emergency rescue has unleashed a foreseeably protracted legal fight with multiple fronts. Lawsuits have been filed from countries including the United States, the UK, and Singapore, against the Swiss financial regulator, Finma. Sanctioned by two emergency ordinances, Finma greenlit the wipe-out of $17 billion of AT1 bonds issued by CS to make the deal easier to swallow for UBS. As a result, holders of these high-risk convertible bonds took the bullet, while shareholders were handed $3.25 billion in UBS shares, in a move that appeared to bust the debt recovery rulebook wide open and caused uproar amongst empty-handed investors feeling blindsided by the move. Litigation powerhouse Quinn Emanuel Urquhart & Sullivan led the charge against Finma by joining forces with several law firms representing AT1 bondholders across different jurisdictions. Their case is centred on the “proportionality” and “good faith” of Finma’s decision following the Swiss Constitution. Across the Asia-Pacific region, Singapore Big Four firm Drew & Napier is working with Swiss firm Nater Dallafior to help two groups of around 90 bondholders bring administrative law challenges based on Swiss legal principles. “Our clients are seeking to, among other things, set aside the Finma Order with CS reversing the write-down and cancellation of all AT1 bonds and acknowledging its obligations to bondholders with retroactive effect to the time immediately before the write-down,” explains Benedict Teo, head of banking and financial disputes at Drew & Napier. “The challenge rests on the basis that Finma’s exercise of its discretion to order CS to write down the AT1 bonds was improper and/or invalid and that the order to CS to write down the bonds violated the principle of proportionality and was issued in bad faith,” notes Teo. Mahesh Rai, a dispute resolution director, is working on the matter with Teo. Some law firms representing investors based in Asia are pursuing alternative legal strategies to seek redress. One of these arguments accused Finma of breaching investment protection clauses enshrined in the multilateral treaties signed between Switzerland and these Asian countries, including Singapore, China, Japan, and South Korea. Shaun Leong, a dispute resolution partner at Withers KhattarWong, says his firm is taking a rights-centric approach based on international investment law when representing “a massive group of investors, funds to family offices” mainly from Singapore. There are questions “as to what extent can non-Swiss based investors avail themselves of any arguments arising from the Constitution. It is also not immediately clear how the administrative action would result in compensation to investors,” says Leong. However, “Investors have rights, and we hope to be able to challenge against any arbitrary exercise of powers,” he adds. Insurance specialist RPC advises institutional intermediaries, who are under pressure from their bondholder clients and bondholders in Asia, according to disputes and investigations partner Jonathan Crompton. In addition, “we are in the process of advising bondholders in Asia on practical options that will maximise their chances of recovering losses from the bonds in a cost-effective manner,” says Peter Kwon, a financial disputes and advisory partner at RPC. VIOLATING EXPECTATIONS Traditionally known as the “absolute priority rule” in corporate reorganisation and bank restructurings, creditors cannot be forced to accept cuts if shareholders are not completely wiped out. As such, lawyers representing bondholders accuse Finma of violating the investors’ legitimate market expectations in a rebuke to the argument that it was never codified that the AT1 instruments are senior to equity. “One of the key questions we need to ask is, ‘What legitimate expectations did the AT1 bondholders have in the face of such an extraordinary intervention by the state?’ When it comes to debt securities, this is a legal question and not merely a practical one, which is evident from extensive risk factors set out in the relevant documentation,” says RPC’s Kwon. AS BACKLASH MOUNTS OVER CREDIT SUISSE’S AT1 WIPE-OUT, ASIAN BONDHOLDERS READY LAWSUITS