Home Publications In a precedent-setting judgment, the court legitimized the mechanism of conditional early repayment of bonds

In a precedent-setting judgment, the court legitimized the mechanism of conditional early repayment of bonds

In a precedent-setting judgment in favor of a client of our firm, who was represented by Advocates Refael Liba and Yohai Shelef, and which was given on September 2, 2021, by the Economic Department in the Tel Aviv & Jaffa District Court (Class Action 35297-08-19 Proxima v. Mediterranean Sea Towers), the honorable Justice Ruth Ronnen held that the conditional early redemption mechanism adopted by dozens of public companies in the Israeli economy over the last few years is legitimate and consistent with the provisions of the bond trust deeds and the law.

The case began when the investment house, Proxima Investment Management Ltd., filed a motion for certification of a class action against Mediterranean Sea Towers Ltd., which is represented by our firm. Proxima claimed that Mediterranean Sea Towers gave notice in June 2019 that it would make early repayment of (series B) bonds only on the condition that it would succeed in completing the issue of a new series of bonds, the proceeds of which would be used by it to repay the old bonds. Mediterranean Sea Towers gave notice that there was no certainty that it would indeed make an additional issue of a new series of bonds. In July 2019, Mediterranean Sea Towers announced that the issue of the bonds from the new series had been successful, i.e., that the condition precedent had been fulfilled, and that it intended to repay the bonds of the old series.

Proxima claimed that the trust deed of the old bonds did not include a possibility of making conditional early repayment (as opposed to the right to make an ordinary unconditional early repayment), and therefore, it claimed that the consideration that the holders of the old bonds were supposed to receive should be calculated according to the market value of the old bonds on the date when Mediterranean Sea Towers announced the fulfillment of the condition precedent (July 2019), and not according to the market value of the old bonds on the date when Mediterranean Sea Towers gave notice for the first time of the conditional early repayment (June 2019), since that was the date on which the early repayment was certain and absolute from the viewpoint of the investors, rather than conditional. Proxima claimed that the calculation of the consideration as aforesaid would entitle the holders of the bonds to financial restitution in a total sum of almost three million new shekels.

In the reasoned judgment of Justice Ruth Ronnen, she denied Proxima’s motion for certification of the action as a class action. She held, inter alia, that the public company needed certainty regarding the amount that it was liable to pay to the bondholders on the date when it gave notice of its intention to make a conditional early repayment, so that it could consider whether the course of action of the conditional early repayment and the issue of the new bonds was viable from a business viewpoint.

The judge referred to dozens of cases of public companies that conditioned the early repayment of their bonds on a condition precedent, during the two years before the filing of the action, and she held that it could be seen from this that there was an accepted practice in the market and that the provisions of the trust deed in this case should be interpreted according to that practice.

The judge also held that accepting Proxima’s position might provide an opening for manipulations in the price of the bonds during the period before the fulfillment of the condition precedent, during which the market was aware of the possibility of early repayment. Such manipulations might frustrate the assumption that the average market price of the bonds did indeed reflect their true value and result in the involvement of outside parties.

Therefore, the mechanism of conditional early redemption of bonds has been recognized for the first time and has received the stamp of approval of the court that examined the matter in a precedent-setting manner.

* The aforesaid is provided as general information only and should not be relied upon in any specific case without additional legal advice.
* For any question or clarification relating to the aforesaid or in any case where there is a need for specific advice, please do not hesitate to contact the Litigation Department at our firm.

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