Claims of Credit Suisse AT1 Investors?
As mentioned in my first article dedicated to the collapse of Credit Suisse (“CS”), dated 26 March 2023, the full write down of the CS Additional Tier 1 (“AT1”) capital instruments, ordered by the Swiss financial markets’ regulator FINMA in connection with CS’s merger with UBS, facilitated or possibly even ordered by the Swiss authorities during the weekend of 18 / 19 March 2023 (the “CS-UBS-Merger”), caused quite some upheaval in international media.
The purpose of this second article is to share some additional preliminary thoughts on what CS AT1 investors might do in an effort to recoup some or all of their losses caused by FINMA’s above-mentioned write down order.
A) Potential cause of action
Subject to an in-depth analysis of the relevant prospectuses as well as the applicable Swiss statutory provisions, should CS’s write down of the AT1 instruments not have been lawful, i.e., neither covered by the prospectuses’ terms, nor by Art. 5a of the Swiss government’s emergency ordinance of 19 March 2023 (the “Emergency Ordinance”), authorizing FINMA to order the borrower and the financial group to write down AT1 capital instruments, holders of AT1 instruments may have a claim against CS and, following the consummation of the CS-UBS-Merger, UBS for a reversal of the write down in question. Alternatively, CS AT1 holders may have a claim for damages in the context at issue (as mentioned, subject to an in-depth analysis of the relevant prospectuses as well as the applicable Swiss statutory provisions).
Simply put, if the write down of the AT1 instruments in question was unlawful, holders of such instruments should, in principle, have a right to have such write down reversed or, at least, be compensated for their losses that have been caused by the write down.
From the investors’ perspective, there would seem to be two principal hurdles to overcome in the present context: First, the write down conditions of the relevant AT1 prospectuses. Second, Art. 5a of the Emergency Ordinance.
Regarding the first of the above-mentioned hurdles, i.e., the wording of the relevant prospectuses, in the sense of a very preliminary assessment, it would appear that one of the critical legal issues in this regard is the question whether the conditions of a “Write-down Event” in the form of a “Viability Event” as per “Condition” 7(a)(iii)(B) of the relevant offering memoranda were met. In this regard, the position is advanced in the current discussions that the conditions of this “Viability Event” as defined in the relevant offering memoranda were not met, because the support provided by the Swiss government to CS would not have the effect of improving CS’s capital adequacy (see “Condition” 7(a)(iii)(B), emphasis added: „… CSG has received an irrevocable commitment of extraordinary support from the Public Sector (beyond customary transactions and arrangements in the ordinary course) that has, or imminently will have, the effect of improving CSG’s capital adequacy…“). Regarding this position, see, for instance, the interesting article of Ruedi Keller, published in the Neue Zürcher Zeitung on 25 March 2023, at page 5.
As far as the second hurdle is concerned, the Swiss federal government used its constitutional power to issue emergency legislation in situations of distress not only in relation to CS and UBS shareholders, depriving them of their legal right to vote on the relevant merger transaction, but also concerning the full write down of the value of the CS AT1 capital instruments. Such constitutional power is vested in the Swiss federal government on the basis of Art. 184(3) and Art. 185(3) of the Swiss Federal Constitution of the Swiss Confederation, dated 18 April 1999, as amended (currently as of 13 February 2022) (the “Swiss Constitution”). In this regard, the Swiss courts will have to determine whether or not the Swiss federal government overstepped the boundaries of its relevant emergency legislative powers when enacting Art. 5a of the Emergency Ordinance, used by FINMA when ordering CS to write down the AT1 instruments. Concerning this test, i.e., whether or not Art. 5a of the Emergency Ordinance is lawful, one key issue will be to determine the proportionality of such provision. Pursuant to Art. 5(2) of the Swiss Constitution, any state activity must be proportionate. In this context, see, for instance, the interesting essay of Urs Saxer, published in the Neue Zürcher Zeitung on 4 April 2023, at page 18.
In terms of the practical procedure to follow, it would appear that the first step for AT1 instrument holders would have to be to challenge the FINMA write down decision before the Swiss Federal Administrative Court (the “SFAC”), essentially to avoid any objection in a proceeding against CS / UBS that such order has entered into force of law and may not be called into question anymore.
As mentioned above, these are only very preliminary thoughts in the present context. Hence, a word of caution would seem to be in order: Given the complexity of the relevant factual and legal issues as well as the important amount of discretion at various levels to be exercised when determining such issues, i.e., at the level of the assessment of facts and evidence and at the level of the interpretation of open, not precisely defined legal terms and concepts (such as the above-mentioned condition of proportionality), it is to be hoped that prior to engaging in any legal proceedings, potential claimants analyze their legal position in detail and obtain a detailed and full explanation of the cost implications of such proceedings.
Any potential claimants should realize that time is of the essence. In relation to a challenge of the FINMA write down decision before the SFAC, the deadline in question would appear to end on 3 May 2023, at the latest. Pursuant to Art. 50(1) of the Swiss Federal Administrative Procedure Act (the “APA”), appeals must be filed within 30 days following a decision. Since the relevant FINMA decision would appear to have been taken on 19 March 2023, the 30 days’ period, including the Easter break (Art. 22(1)(a) of the APA), would appear to end on 3 May 2023. Needless to say that preparing a submission to the SFAC would, obviously, take some time and should, therefore, not be delayed.
PHH, Zurich, as of 6 April 2023
This article has been written by Dr. iur. Philipp H. Haberbeck (PHH), a Swiss attorney-at-law, who is registered in the Attorneys’ Register of the Canton of Zurich, Switzerland (see, for more detailed information, www.haberbeck.ch). The law firm PHH operates in the form of an individual company (Einzelunternehmen) under Swiss law, registered in the Commercial Register of the Canton of Zurich, Switzerland, with the company identification number CHE-407.615.179. Each and any mandate is exclusively concluded in writing, based on the mutual signing of a mandate agreement. Please note that the information contained in this article is for general informational purposes only and is not intended to constitute legal advice. No actions or decisions should be taken on the basis of this article without seeking specific legal advice.
Rechtsgebiete: Bank- und Finanzmarktrecht