Litigation Coverage: Hunkemöller Minority Noteholders Defend Uptier Claims, Emphasize Violation of Pro Rata ‘Payments for Consent’ Indenture Provision

In motion to dismiss response briefs filed May 21, Hunkemöller International minority noteholders argue their suit challenging the company’s June 2024 non-pro-rata uptier should go forward because the transaction violated a clause in the indenture requiring that any amendment consent payment be offered to all bondholders. According to the plaintiffs, this “Payments for Consent” provision prevented Hunkemöller from uptiering majority holder Redwood to deprive the minority of pro rata treatment.

The defendants – Hunkemöller, Redwood and indenture trustee BNY Mellon – maintain that the elevation of Redwood’s notes in the indenture’s payment waterfall via a separate global note was properly authorized by Redwood and provided €50 million in new money to the company. The minority noteholders counter that allowing the uptier to stand would render minority protections such as the payments for consent provision “a dead letter” and create “a dangerous playbook for issuers to trample minority rights.”

The minority specifically asserts that the elevation of Redwood’s notes “was an archetypal payment for consent.” “In exchange for Redwood’s consent to amend the Indenture,” the minority says, Hunkemöller “redeemed the Notes belonging to Redwood and exchanged them for new Up-Tiered Notes that ranked senior in priority under the Indenture’s payment waterfall.”

The minority notes that the company and Redwood “worked in secret” to remove the payments for consent provision, section 4.18 of the indenture, before the uptier transaction. But according to the minority, that removal was itself a violation of section 4.18 because Redwood “received some form of consideration when it consented to the removal of Section 4.18.”

According to the minority, “[I]t is facially implausible that Redwood, a sophisticated hedge fund, would agree” to give its consent to the removal of section 4.18 away “for free.” The company argues Redwood’s consent to the removal of a minority noteholder protection could have been gratuitous because Redwood was the majority holder, but the minority points out that Redwood could have become a minority holder by selling notes – meaning the provision could possibly have some value for Redwood.

In addition to violating the payments for consent provision, the uptier “violated numerous other Indenture provisions, including restrictions on the issuance of Notes, the redemption of Notes, the exchange of Notes, and the cancellation of Notes,” the minority says. The company claims it merely moved Redwood’s notes up in the payment waterfall and did not actually issue new notes or redeem Redwood’s notes, the minority recounts, but in public statements, the company described the transaction as involving the “issuance,” “exchange” and “cancelling” of notes.

According to the minority, the de facto issuance of new notes to Redwood also violated the indenture because the new notes “are not on terms ‘substantially identical’ to the remaining Notes” and “do not meet the requirements of Additional Notes.” The company points to section 9.04 of the indenture – which allows “administrative changes” to fewer than all of the notes – but that provision does not permit “splitting the same Notes into two separate Global Notes” with different terms, the minority argues.

The minority also asserts that “Redwood was not a registered ‘Holder’ entitled to provide consent” to the removal of the payments for consent provision and the uptier, “and the documentation annexed to Defendants’ motions to dismiss confirms that Redwood never obtained valid authorization” from the registered holder. The minority cites a September 2024 decision in the Bristol-Myers Squibb Celgene CVR litigation for the proposition that “instructions provided only by beneficial owners, without due authorization from the registered Holder, are insufficient” for majority consent.

Finally, the minority defends its fraudulent transfer claims, insisting its amended complaint adequately alleges several “badges of fraud,” including insolvency, concealment of the transaction and lack of reasonably equivalent value for the company. According to the minority, its complaint sufficiently alleges that “agreeing to up-tier €186,075,000 of existing Notes was not necessary” to secure the additional funding provided by Redwood, which was a separate transaction from the uptier.