EXPERT OPINIONS SUPPORTING THE POSITION OF THE MINORITY SHAREHOLDERS IN PTSB GH
The PTSB GH shareholders who challenge in court the legality of the ex parte direction order effected by the Irish Minister for Finance on 26 July 2011 (by means of which the Minister appropriated 99.2% of the PTSB GH paid-in capital that was originally attributable to the original shareholders), rely on the following expert opinions:
- Expert opinions of Professor Wymeersch; and
- Expert opinions of Professor Dr. Azarmi: an opinion of 5 December 2013 and an opinion of 13 January 2014.
Both Professor Wymeersch and Professor Dr. Azarmi unequivocally support the Shareholder Applicants’ case in the aforementioned court proceedings.
Expert opinions of Prof. Wymeersch, one of the world’s utmost authorities on EU corporate law
Professor Wymeersch provided two comprehensive expert opinions on EU law and, in particular, on the Second Company Law Directive. The opinions are dated 14 June 2013 and 4 December 2013, and were sworn by affidavit on 5 December 2013 in the aforementioned High Court proceedings that challenge the July 2011 Ex Parte Provisional Direction Order.
Professor Wymeersch is one of the world's utmost authorities on EU corporate law. Professor Wymeersch studied law at the University of Ghent and at the Harvard Law School. Professor Wymeersch was Regent of the National Bank of Belgium and a member of the supervisory board of the National Bank of Belgium. He was also member of the Legislative Branch of the Council of State in Belgium. Professor Wymeersch was also Chair, Committee of European Securities Regulators (CESR). He was the Chief Executive and Chairman of the Supervisory Board of the Belgian Banking, Finance and Insurance Commission, as well as the Chairman of the European Regional Committee and Member of the Executive Committee and of the Technical Committee of the International Organization of Securities Commission (IOSCO). He was also a member of the High-level committee on a new financial architecture, Belgium (the so-called Lamfalussy Commission), dealing with the reform of the supervision of the financial markets and services. He was a Consultant to European Commission, World Bank, International Finance Corporation, EBRD and OECD. He was Chairman of the SLIM working party (Simpler Legislation for the Internal Market) on the First and Second Company Law Directives, instituted by the EU Commission. He was also a Co-Chair of the CESR-ESCB (the Committee of European Securities Regulators - European System of Central Banks). He was a member of the corporate governance commission of the Brussels Stock Exchange. He was Chairman of the Board of Brussels International Airport Company (BIAC) and several other companies, and adviser on governance issues to several listed Belgian companies. He was also a member of the Beirat of the Hamburg Max-Planck-Institut für ausländisches und internationales Privatrecht, Germany.
Additionally, previous activities of Professor Wymeersch include being Professor of Commercial Law, University of Ghent, Belgium, teaching on company law, securities regulation and banking law; as well as Co-founder of the Financial Law Institute, University of Ghent.
He was also a member of the editorial or advisory boards of several Belgian and European law reviews. He has published extensively on securities regulation, company law and corporate governance.
Professor Wymeersch is an independent director at the Association for Financial Markets Europe (AFME). He is also an independent director of Euroclear SA, the world's largest settlement system for securities transactions, covering both bonds and equities. He is also the Chairman of the Public Interest Oversight Board (the PIOB), the global independent oversight body that seeks to improve the quality of the international standards formulated by the Standard Setting Boards supported by the International Federation of Accountants. He is a member, and was Chairman, of the European Corporate Governance Institute, as well as a member of the Belgian Corporate Governance Commission.
The aforementioned expert opinion of Professor Wymeersch dated 4 December 2013 states, inter alia, the following:
“EU company law directives contain mandatory rules for the protection of shareholders and creditors of companies (including financial institutions) which fall within the scope of those directives. Those mandatory rules can be derogated from only based on a clearly and narrowly defined express provision of EU law. In the absence of such a derogation provision of EU law, no derogation is legally possible [...]
An approach whereby national authorities would allow for an abrogation of or a derogation from the provisions of national legislation, through which an EU directive has been transposed, amounts to an implicit “de-activation” of the provisions of the EU directive. Such an approach would be illegal. For the sake of the stability of the EU legal system, national courts must prosecute to the fullest extent of the law such abuses of power by any national authority.” (Emphases as per the original).
“The Member States are unequivocally and strictly not allowed currently to abrogate or derogate from any of the above-mentioned Articles of the Second Company Law Directive when restructuring financial institutions, in the absence of an express exception under EU law. In the absence of such an express exception under EU law, those Articles must be followed and applied by the Members States at all times, including the times of crises.” (Bold font as per the original).
“The minimum rights enshrined in EU law must not be violated under any circumstances, in the absence of express derogation provisions under EU law.” (Bold font as per the original).
“Any restructuring/recapitalisation of financial institutions during the recent financial crisis could, and had to, be effected only by legal means compatible with EU law; or else such a restructuring/ recapitalisation must be deemed to have amounted to an illegal abuse of power risking de-stabilising the European legal system. I note that it is particularly at times of crisis that investors need legal certainty regarding their investments. Attempting to deprive shareholders of their minimum rights enshrined in EU law under the “cover” of a crisis is not only unsupported by law, but it in fact flies in the face of the principles of EU law, which are aimed at universally guaranteeing rights in the absence of express derogation provisions under EU law.
It is important to state that provisions of EU law such as the Council Implementing Decisions on granting of European Union financial assistance to Ireland (the “Implementing Decisions 2011/77/EU and 2011/326/EU”) mean exactly what they say and nothing more, and ought not to be misused. Specifically, Articles 3(5) and 3(7)(g) of the Implementing Decision 2011/77/EU (as amended by the Implementing Decision 2011/326/EU) (having regard to Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism) state that:
”3(5) With a view to restoring confidence in the financial sector, Ireland shall adequately recapitalise, rapidly deleverage and thoroughly restructure the banking system as set out in the Memorandum of Understanding. In that regard, Ireland shall develop and agree with the European Commission, the ECB and the IMF a strategy for the future structure, functioning and viability of the Irish credit institutions which will identify how to ensure that they are able to operate without further state support. In particular, Ireland shall:
(a) take action to ensure that domestic banks are adequately capitalised in the form of equity, if needed, so as to ensure that they respect the minimum regulatory requirement of a 10,5 % core tier 1 capital ratio for the entire duration of the EU financial assistance programme, while deleveraging towards the target loan-to-deposits ratio of 122,5 % by end-2013;
(b) implement the divestiture of participations in banks acquired during the crisis within the shortest timeframe possible, in a manner compatible with financial stability and public finance considerations; [...]
(d) by the end of 2010, submit draft legislation to the Oireachtas (Parliament) on financial stabilisation and restructuring of credit institutions which will, inter alia, address burden sharing by subordinated debt bond holders;
(e) by the end of March 2011, submit draft legislation to the Oireachtas on a special resolution regime for banks and building societies, and improved procedures for early intervention in distressed banks by the Central Bank of Ireland.”
“3(7). Ireland shall adopt the following measures during 2011, in line with specifications in the Memorandum of Understanding:
(g) the recapitalisation of the domestic banks by end July 2011 (subject to appropriate adjustment for expected asset sales in the case of Irish Life & Permanent) in line with the findings of the 2011 PLAR and PCAR, as announced by the Central Bank of Ireland on 31 March 2011.”
Thus, the Implementing Decisions 2011/77/EU and 2011/326/EU do not - and could not - allow any abrogation from the above-mentioned provisions of EU law, i.e. from Articles 8(1), 15, 25(1), 29(1) and 42 of the Second Council Directive 77/91/EEC; Article 10 of the Directive 2009/101/EC; Articles 5, 42 and 45 of Directive 2001/34/EC; Articles 14.4 and 42 of the MiFID Directive; Article 3 of the Takeover Directive, or Article 63 TFEU. The Member States are unequivocally and strictly not allowed currently to abrogate or derogate from any of those provisions of EU law when restructuring financial institutions, in the absence of an express exception under EU law. In the absence of such an express exception under EU law, those Articles must be followed and applied by the Members States at all times, including the times of crisis.
Thus, Member States should not propagate a false choice, i.e. that either a bank is recapitalised or EU law has to be broken. Such an approach is completely misconceived. What Member States had to do when recapitalising banks was to recapitalise banks in a legal manner compatible with EU law. And, importantly, breaching any of the above-mentioned provisions of EU law was plainly not necessary and, reasonably cannot be deemed to have been necessary, to effect a recapitalisation of a bank.
It is also incorrect to claim that the breaches by the State any of the above-mentioned provisions of EU law cannot be revoked without a repayment of the recapitalisation funds injected into financial institutions by the State. That is plainly not so. For the sake of the stability of the EU legal system, the national courts must invalidate and revoke measures that are incompatible with EU law. That, however, does not mean that the recapitalisation funds have to be repaid. On the contrary, the recapitalisation funds must stay in the recapitalised financial institutions, if it is required pursuant to provisions of EU law such as the said Implementing Decisions 2011/77/EU and 2011/326/EU. Otherwise, under the threat of revoking the recapitalisation, the State would be allowed to permanently breach EU law, which would de-stabilise the entirety of the legal system of the EU. And the Member State in question would be allowed to breach EU law just because it claims that either it had to break EU law or it would not have been able to recapitalise financial institutions in question. That is a completely false choice. The threat of revoking the recapitalisation cannot serve as a justification for violating EU law. Under EU law, including provisions such as the aforementioned Decisions 2011/77/EU and 2011/326/EU, there may be currently no possibility to revoke bank recapitalisation per se, meaning it may be legally impossible to take back from recapitalised banks the recapitalisation funds. However, illegal measures undertaken by the State in conjunction with bank recapitalisation, but not required for the bank recapitalisation (such as measures breaching the above-mentioned provisions of EU law, the subject of this document), must be precluded / revoked by national courts.
Thus, specifically, measures undertaken by the State, which revoked decisions of a general meeting of the bank’s holding company and which effected a capital increase in the holding company against the decisions of the general meeting, in order to appropriate share capital of the holding company, must be precluded/ revoked. Such measures are in breach of: i) Art. 25(1) of the Directive 77/91/EEC; ii) Art. 10 of the Directive 2009/101/EC (in respect of revoking decisions of a general meeting); iii) Art. 42 of the MiFID (in cases where the State is deemed to be a related party and the stock exchange rules regarding related party transactions were breached). Such illegal measures cannot be deemed to be necessary to effect a recapitalisation of a financial institution. The original shareholders of the holding company must regain the shareholding, which they have been illegally deprived of.
Moreover, measures undertaken by the State which provide for an adoption of a decision to revoke an explicit resolution of a general meeting of the holding company and to lower the nominal value of the company’s share and to concurrently change respectively the company’s memorandum and articles of association, in order to increase the capital of the company by issuing shares at a price lower than their nominal value that had been originally set in the memorandum and articles of association, must be precluded / revoked. The pre-existing rights of the original shareholders of the holding company must be protected. The State must be prohibited from issuing new shares at a privileged price. The absolute floor for any share issuance is the nominal value (from before any illegal changes to the nominal value), as pre Art. 8(1) of the Second Council Directive 77/91/EEC.
Furthermore, measures undertaken by the State depriving shareholders of the bank’s holding company of pre-emption rights guaranteed by Art. 29(1) of the Second Council Directive 77/91/EEC must be precluded / revoked. Such illegal measures cannot be deemed to be necessary to effect a recapitalisation of the bank in question. The shareholders of the holding company must be offered the mandatory pre-emption rights. Those shareholders who do not wish to take up their pre-emption rights will have an opportunity to offer their pre-emption rights for sale. Of course, those pre-emption rights must not be below the nominal value of the share; and the nominal value in question must be based on the company’s memorandum and articles of association from before those constitution documents were forcibly changed against the will of the company’s general meeting.
Finally, a Member State acquiring control of a bank’s holding company must make a mandatory offer pursuant to Article 5 of the Takeover Directive, as set out above, i.e. at an equitable price that must not be below the nominal value set in the memorandum and articles of association of the company in question prior to any illegal changes to that nominal value. That will allow those shareholders who do not wish to stay as shareholder, in the new circumstances, to exit their holdings.
In the above context, the bottom line is that capital injected in a bank during the financial crisis must stay in the bank, if that is required pursuant to EU law, but the original shareholders of the bank’s holding company must regain any shareholding that they have been illegally deprived of in breach of EU law. The shares, which were issued in a manner incompatible with EU law, must be re-issued in a manner compatible with EU law that was in force when the capital injection in question was made. And the minimum shareholder protections required by EU law must be enforced.” (All emphases as per the original).
Expert opinions of Prof. Dr. Azarmi
Professor Dr. Azarmi, who is a professor of finance and accounting, provided the relevant PTSB GH shareholders with two expert opinions:
- an opinion of 5 December 2013 and
- an opinion of 13 January 2014.
The expert opinions of Professor Dr. Azarmi cover a wide spectrum of matters, including, inter alia, accounting issues related to the separate capital of PTSB GH. Among others, Professor Azarmi provides unequivocal evidence that, following the July 2011 Ex Parte Provisional Direction Order, 99.2%, i.e. approx. €432 million, of the separate paid-in capital of PTSB GH became attributable to the Minister, to the detriment of the original shareholders in PTSB GH. That evidence has not been in any way rebutted or impugned by either the Minister or PTSB / PTSB GH (which the Minister currently controls and which support the Minister in court proceedings).
The expert opinion of Prof. Dr. Azarmi of 5 December 2013 concludes the following:
"I conclude in respect of the direction order of 26th July 2011 (which was made in the terms of the proposed direction order made by the Minister on 25th July 2011) that:
(a) The actions of the Minister for Finance were excessive and unjustified in that he appropriated 99.2% of the ILPGH voting share capital but contributed no more than 64% of the required equity capital. That excessive appropriation of the shareholders’ equity had nothing to do per se with satisfying any capital requirements. Given that ILPGH has never been in a process of liquidation of winding up, such a transfer of wealth from the ILPGH shareholders to the State is inequitable, especially if achieved by means that were incompatible with EU law, such as effecting the share issue below the share’s nominal value (i.e. after forcing the change in the ILPGH Memorandum and Articles of Association in order to lower the share’s nominal value before issuing more than 36 billion new shares, against the respective decisions of a general meeting).
(b) The Minister / the Company failed to conduct an adequate investor search and should, therefore, not claim unjustifiably that there were no investors who would be able and willing to participate in the ILPGH recapitalization in 2011. In the absence of an adequate investor search, such statements amount to speculations.
(c) The Minister for Finance unduly effected the share issue at the price significantly below the share’s nominal value of 32 cents, against the respective decision of the ILPGH EGM. That resulted in a transfer of wealth from the original ILPGH shareholders to the State, which was achieved by means incompatible with EU law. Specifically, circumventing the iron rule of law that no shares can be issued below the nominal value, and forcibly changing the ILPGH Memorandum & Articles of association against the decision of the ILPGH general meeting, in order to reduce the nominal value from 32 cents to 3.1 cents, must be seen as flying in the face of the EU principles enshrined Article 8(1) of the Second Company Law Directive.
(d) The Minister effected the capital increase in ILPGH in a manner that was incompatible also with other foundations of EU corporate law, and in particular with Articles 25(1) and 29(1) of the Second Company Law Directive, whose transposition he ignored or violated. That was unlawful because those legal provisions were put in place in order to set unbreakable rules of law that must guide any capital increases made by public limited companies in the EU. In the absence of specific provisions of EU law allowing for exceptions from the above-mentioned iron rules of law, those rules plainly cannot be breached by anyone, under any circumstances.
(e) When injecting capital into ILPGH at the chosen price of 6.345 cents a share, which was five times below the nominal value existing before the Minister’s intervention, the Minister ignored the false market in the ILPGH share, which was at least partly caused by his own announcement on 31st March 2011 confirming the rumors that the State would take over a majority stake in ILPGH as a result of the sudden and unexpected capital requirement of Euro 4 billion imposed on the Bank."
PTSB Shareholders Oppose Blatant Breaches of EU Law by Irish Finance Minister