A Bank’s Issue of Convertible Bonds: Revisiting a Chapter of the Fortis Affair

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We revisit a case that sheds light on the October 2007 acquisition of the Dutch bank ABN Amro by the consortium of Fortis, Royal Bank of Scotland and Santander, and on the issue and status of certain particular financial instruments.

1. The issue of instruments (CCEN and MCS) to acquire ABN Amro in 2007

In 2007, to finance part of the project, four Fortis-group companies issued a EUR 2 billion bond in two phases: the issue of Conditional Capital Exchangeable Notes (CCEN) in August 2007, and their mandatory exchange into Mandatory Convertible Securities (MCS) in December 2007, subject to the completion of a EUR 13 billion capital increase of the Fortis holding companies. The increase completed, the CCEN were converted into MCS, some listed in Luxembourg. The MCS had to be converted into paired Fortis shares three years after issue, on 7 December 2010, at a pre-set conversion ratio.

2. The break-up of Fortis in 2008 and 3. Acquisition of MCS by investment firms in 2009

Fortis was broken up in 2008 (Belgian banking activities to the Belgian State and BNP Paribas; Dutch activities to the Dutch State; Fortis SA/NV became Ageas). In 2009-2010, US and Cayman investment firms bought MCS then trading at only 8-10% of face value. Holders suffer a loss at maturity, since the securities can be bought more cheaply on the market. In October 2010, these firms asked the Trustee to convene a meeting of MCS holders to move the maturity from 7 December 2010 to 7 December 2030.

4. Summary proceedings and 5. Conversion into Ageas shares

Ageas summoned the investment firms before the President of the Brussels Commercial Court to suspend the effects of any decision of the bondholders’ meeting. The President granted this. The same day, the meeting adopted the resolution and changed the maturity. On 7 December, the issuers converted the MCS into Ageas shares. The investment firms then sought the nullity of the conversion, arguing it disregarded the bondholders’ resolution. The claim was admissible but unfounded; they appealed, relying on Article 568 of the then Companies Code, which grants the bondholders’ meeting a right to modify the loan terms.

The Brussels Court of Appeal’s analysis

The court recalled that MCS are hybrid instruments combining debt and capital features, with Tier 1 status, mandatorily and automatically converted into Fortis shares at maturity. On Article 568, it held: (1) the powers of the bondholders’ meeting cannot be exercised against the company’s interests; where a decision modifies the loan terms, it binds the company only if approved or proposed by it (now expressly required by Article 5:109 of the Companies and Associations Code); (2) the bondholders’ meeting is not an organ of the company, so Article 568 confers no unilateral power to modify the loan terms; (3) the MCS issue had to be structured as a kind of forward share purchase (a purchase obligation through conversion, not a mere option) to count as Tier 1 own funds; allowing holders to modify or cancel the conversion clause unilaterally would jeopardise that Tier 1 recognition. The court held the resolution did not bind the issuers absent their agreement, and that the 7 December 2010 conversion was valid. A Cassation appeal was rejected.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.