Welcome back to Focus!
Once again we have a lot to update you on in this edition of Focus. 2020 has kicked off with similar trends to those that we saw towards the end of 2019. In line with the growing attention on captive power initiatives and projects, Trinity recently hosted seminars in London and Paris to discuss financing issues and the many opportunities presented to the power sector in developing captive projects. We also attended the Mining Indaba in South Africa in February where, for the first time in the conference’s many years, power (by way of captive power projects) was put forward as an important part of the conference. Trinity has for many years promoted the integration of infrastructure and mining given the symbiotic relationship of the two, particularly in addressing some of the key bankability issues that face these projects. It was refreshing to see many power developers attending the conference, unheard of a few years ago. To further highlight this, in this edition of Focus we are pleased update you on Genser Energy’s USD366m financing of its captive power projects in Ghana, where we represented the DFI and commercial lenders on the project. https://www.trinityllp.com/genser-energy-usd-366m-financing/
In keeping with new trends in the power sector, we also advised on the 60MW Djibouti wind project, one of the first major IPPs in Africa which has applied a model of being fully equity financed at the outset with the intention that project finance debt will be applied later in the life of the project. https://www.trinityllp.com/equity-financing-for-djibouti-60-mw-wind-farm-project/
Away from power, we are also pleased to announce that we advised Atlantic Terminal Services Limited in respect of the construction and financing of a container terminal and multipurpose use terminal in Takoradi Port, Ghana. You can also find further details of this transaction on our website. https://www.trinityllp.com/advising-on-the-construction-and-financing-of-takoradi-port-ghana/
Also in this edition of Focus, Conrad Marais and Adekanmi Lawson look at deadlock provisions in shareholders’ agreements, with a twist – anyone for Russian Roulette and premiership football? Jo Sykes also updates us on the LIBOR transition process.
LIBOR transition – the impact on project financed transactions
2020 will be a key year in the LIBOR transition process, with a clear message from regulators that significant progress must be made in relation to both new, and legacy, contracts. Although market responses to date suggest that LIBOR replacement rates will, at least initially, be based on overnight risk-free rates, market participants have yet to agree a single convention. This has prevented the LMA from publishing full and final recommended documentation, although exposure drafts based on compounded SONIA (for Sterling transactions) and SOFR (for US Dollar transactions) are now available.
Although participants in new transactions clearly face challenges in agreeing terms to reflect the transition away from LIBOR, the issue will be particularly acute for lenders and borrowers involved in legacy transactions, where numerous amendments are likely to be required. In the project finance context specifically, consideration will be required not only in relation to the terms of the finance documents, but also to any provisions contained in the project documents that refer to LIBOR (e.g. in respect of the calculation of tariffs and termination payments, and in default interest provisions). Since the fallback provisions in each of these documents are unlikely to be aligned fully (and, in some cases, may be non-existent), work will need to be done to agree and effect new calculation mechanics well before the publication of LIBOR ceases altogether at the end of 2021.
With extensive experience advising on projects throughout emerging market jurisdictions, and an award-winning, senior-led team of finance lawyers, Trinity is well placed to assist clients with navigating the LIBOR transition process and developing and implementing solutions to the challenges faced. For more information or advice, please do get in touch with Partner Simon Norris, Counsel Barry Burland or Senior Associate Jo Sykes.
Backfiring Russian Roulette
It is not often that premiership football delivers us lessons on provisions in legally binding agreements.
In the case of McCabe and Prince Abdullah, the High Court looked at the co-investment agreement pursuant to the two had invested funds into Sheffield United Football Club. In the agreement, the two had included a “Russian Roulette” deadlock provision.. Under a typical Russian Roulette mechanism, a shareholder is entitled to issue a notice to the other shareholder(s), offering to buy out the other shareholder(s) at a specified price. However, the offerree shareholder(s) may serve a counter notice to buy out the offeror shareholder’s shares at the same price.
Following disagreement on the direction of the club, McCabe served a roulette notice on Prince Abdullah, requiring Prince Abdullah to either sell his stake in the club to McCabe for a price set by McCabe (£5 million) or buy McCabe out for the same price. In this case, the roulette mechanism had a consequential implication as the agreement stated that if the Prince reached a 75% ownership of the club, he was also obliged to also purchase the stadium, the academy and other properties valued between £40-50 million from McCabe. It has been argued that McCabe knew that Prince Abdullah would not be in a position to buy the properties and would therefore have to sell his shares for £5 million.
In response to the notice, Prince Abdullah attempted to avoid having to buy the properties by forming a new company and transferring 80% of his shares in Sheffield United to the new company – thus falling below the 75% threshold which would trigger the obligation to buy the properties. He then served a counter-notice to McCabe to buy McCabes’s shares at £5 million. McCabe refused to go through with the sale of his shares; he argued that the Prince was in fundamental breach of their agreement by transferring his shares to another entity. The Prince then sued McCabe, arguing that McCabe should be forced to sell his 50% for the £5 million set price and that he did not have to buy the properties as well. Although the judge found that Prince Abdullah fundamentally breached his agreement with McCabe by seeking to avoid buying the stadium, academy and other properties as well, he ruled in the Prince’s favour with respect to the Russian Roulette provision ruling that when the Prince served the counter-notice, it immediately created a standalone binding contract for the sale of the shares. This was despite the fact that the value of the shares had increased from £5 million to £52 million, owing to strong on-field performance from the club. The judge also ruled that the Prince would have to buy the properties.
This case highlights the practical importance of deadlock provisions and also sets precedence for when, and in what circumstances, a notice and a counter-notice become binding, therefore creating a standalone, binding contracts. Whilst the value of a deadlock mechanism is generally well understood – a protracted deadlock can lead to financial difficulty – it is our experience that the form of deadlock resolutions available and their practical implementation, is less well understood. It is certainly the case that deadlock mechanics can be manipulated by a counter party, this being one of the reasons why many choose not to have them in the first place – rather have the relationship in deadlock than be on the wrong end of a Russian roulette game! However, thought through properly, a deadlock mechanism can be a genuinely helpful arrangement between the parties to resolve key deadlocked matters or situations.
There are various contract mechanisms available to co-investors to resolve deadlocks. The appropriate mechanism will depend on the company structure and the relative strengths of the shareholders. In addition to the Russian Roulette provision, another common provision is the “Texas Shootout”, which has the effect of terminating a joint venture in circumstances where both parties are interested in buying the joint venture vehicle company. In this situation, both parties submit sealed bids and the successful party is the one with the higher bid.
There are many other variations on these or alternative mechanics, for example, the parties may be forced to mediate or call on expert determination. Some shareholders include put and call rights in the event of a dispute although this is quite often resisted because of the perceived possible fabrication of disputes to trigger a call or put option. One particularly blunt mechanic is simply that the company/joint venture is dissolved or liquidated and its assets distributed to the shareholders. This certainly focuses the mind and because of the ultimate nuclear sanction, it is included in agreements because parties perhaps never anticipate using it. As everyone knows, however, commercial relationships can get complex and even dissolution of a joint venture may have particular commercial benefits for one shareholder and not the other at a given time.
Many joint venture parties steer away from the relatively blunt forms of deadlock solutions referred to above. Instead, they will either stay silent on the matter (as mentioned above – relying instead on commercial sense at the time to prevail) or will include what is colourfully known as a “gin and tonic” provision, where management of the disputing parties will meet to discuss the matter and a possible way forward. Strictly speaking, this is not a deadlock resolution mechanic (as it may still lead to further deadlock if agreement cannot be made), but it does often tend to be used where the parties understand the need for a deadlock solution, but agreeing on something that will ultimately end the deadlock gets too challenging. As always, agreeing a provision about disputes at the very start of a promising relationship is always difficult to raise – especially for lawyers who know the importance of the provisions but do not want to be seen as the fun police!
The Trinity corporate team advises on deadlock provisions as standard practice in drafting and negotiating shareholders’ agreements, joint development agreements and other co-investment agreements. Please contact Conrad Marais, Hugh Naylor or Adekanmi Lawson for any queries you have involving shareholder or other equity matters.