Blackstar Advisors Ltd v Cheyne Capital International Ltd & Anor

Mr Lance Ashworth QC, who appeared for Blackstar with Mr Matthew Morrison, argued that, correctly construed, the contractual documents provided for Blackstar’s entitlement to fees to persist for so long as ARRCO remained invested in Cheyne funds, regardless of whether there was a change in the structure of the vehicle through which the investment was held. The focus of the “Existing Deals” section of the CIFS Agreement, Mr Ashworth submitted, was on ARRCO investing, not on the structure of that investment; the references to “seven … year maturity” and SDFP were merely descriptive. The “Fee on Existing Deals” section was thus to continue to apply even if the investment were structured differently. Under the 2008 Letter Agreement, Blackstar accepted the Amortizing Note in substitution for the sums that would otherwise have been due to it up to 31 December 2013 (the final maturity date of the Amortizing Note), but it retained its right to fees on ARRCO’s €220 million investment after that date. Alternatively, paragraph 1 of the 2009 Letter Agreement served to revive Blackstar’s fee entitlement and the French Restructuring did not bring it to an end. “LuxCo Investor” and “LuxCo Investment” have to be read as shorthand for ARRCO and its €220 million investment, so that what matters is that the investment endured, albeit through a new structure. Even if (contrary to

In contrast, Mr Steven Berry QC, who appeared for the defendants with Mr David Peters, maintained that Moulder J was correct to hold that Blackstar lost any entitlement to additional fees when the French Restructuring was carried out. The parts of the CIFS Agreement dealing with “Existing Investments” defined the relevant investments with precision, by reference to their structure. In any case, Blackstar gave up any other right to fees in respect of ARRCO’s €220 million investment when it entered into the 2008 Letter Agreement and accepted the Amortizing Note. It acquired a further fee entitlement under the 2009 Letter Agreement, but only if and for so long as HDFP (as the “LuxCo Investor”) extended the terms of the existing “LuxCo Investment”, which meant the investment made pursuant to the “Portfolio

Moulder J considered that “the objective construction of paragraph 1 of the 2008 Letter Agreement is that it discharged the obligations of Cheyne under the CIFS

Agreement and was not a discharge only up until the maturity date of the SDFP Note” (paragraph 103 of the judgment). However, the judge thought it implicit in that conclusion that references in the 2008 Letter Agreement to the “LuxCo Investor” and the “LuxCo Investment” were “not to be read as limited to HDFP and the investment made by HDFP in the Cheyne funds” (paragraph 104). She concluded in paragraph 109:

“although on a literal interpretation, paragraph 1 of the 2008 Letter Agreement is limited to amounts payable by Cheyne to Blackstar in relation to HDFP as the ‘LuxCo investor’ and the LuxCo investment, I find that this is not the objective meaning of the language which is to be interpreted as to the ‘LuxCo Investor’ as a reference to the investment by ARRCO in the Cheyne funds and as to the ‘LuxCo Investment’ as the investment of the €220 million through the SPV, SDFP”.

The judge none the less held that paragraph 1 of the 2009 Letter Agreement did not apply to the French Restructuring. She saw the fact that the French Restructuring did not involve SDFP as crucial here. She said in that connection (at paragraph 122 of her judgment):

“although I accept that the reference to the ‘LuxCo investor’ … should be construed as a reference to ARRCO, I find that the objective meaning of paragraph 1 of the 2009 Letter Agreement was that if ARRCO extended the term of the investment through SDFP, the fee obligations to Blackstar would be subject to the terms of the CIFS Agreement, but the 2009 Letter Agreement is not to be construed as conferring or continuing any entitlement to fees if the ARRCO Investment is not through SDFP”.

She had explained as follows in paragraph 119:

“There is no basis on the language of the CIFS Agreement for the submission that the CIFS Agreement originally provided that Blackstar should continue to receive fees for so long as the investments remained with Cheyne, whatever structure was used. Further there is no basis on the language for construing the ARRCO programme as having the more extended meaning of ‘any investment by ARRCO’ or for the ARRCO programme being construed as extending to any investment in Cheyne funds even if it is not through the SDFP structure. The ‘Existing Deals’ in the CIFS Agreement defines the deal as ‘€2 billion discretionary investment programme for ARRCO with a seven year maturity… through a dedicated newly formed SPVcalled [SDFP].’ [Emphasis added] Thus, reading the 2009 Letter Agreement together with the CIFS Agreement, paragraph 1 of the 2009 Letter Agreement would not extend to the French Restructuring as an extension of the investment described under ‘Existing Deals’ since it was a different structure not through SDFP but through FCP.”

In the circumstances, the judge stated in paragraph 126 of the judgment:

“I find that the ‘LuxCo Investment’ was extended within paragraph 1 of the 2009 Letter Agreement but only until the end of the first quarter of 2014. Thereafter upon the establishment of the FCP structure and transfer of the assets, the ‘LuxCo Investment’ ended and Blackstar did not have the right to fees on the FCP structure.”

The judge also said this, in paragraph 130 of the judgment:

“Finally, I deal with the submission that at the time of the introduction of FCP, ARRCO continued to hold the assets (through FCP) in the same way as they had been when the first tranche of the ARRCO programme was invested through HDFP and accordingly the Restructuring was an extension of the ‘LuxCo Investment’ because ARRCO continued to invest by HDFP, the ‘LuxCo Investor’. For the reasons set out above, in my view the reference to the ‘LuxCo Investor’ has to be read by reference to the CIFS Agreement as a reference to ARRCO and the ‘LuxCo Investment’ as the programme for ARRCO through SDFP. On the evidence of the documentation effecting the French Restructuring, the swap between SDFP and HDFP pursuant to which HDFP held the interest in the Cheyne Funds was novated such that SDFP as swap counterparty transferred its rights and obligations under the swap to FCP. Accordingly at that point SDFP ceased to be part of the structure and was replaced by FCP. There was no period during which the assets held by FCP were held through SDFP so as to fall within the language of ‘Existing Deals’.”

I find it convenient to approach the CIFS Agreement, the 2008 Letter Agreement and the 2009 Letter Agreement chronologically, as Mr Ashworth and Mr Berry did in their oral submissions.

Taking then the CIFS Agreement first, Moulder J evidently understood the “Existing Deals” and “Fee on Existing Deals” sections to apply to investment by ARRCO only if made through SDFP and with a seven-year maturity. While, however, the “Existing Deals” box speaks of “a seven … year maturity”, that relating to “Fee on Existing

On balance, it seems to me that neither “a seven … year maturity” nor the involvement of SDFP was essential. The preferable view is that the relevant “Existing Deal” was simply the “€2.0 billion discretionary investment program for ARRCO”. As it happened, the first tranche of that programme was invested through SDFP and with a seven-year maturity. I do not think, however, that Blackstar’s right to fees necessarily depended on either feature.

Coming on to the 2008 Letter Agreement, I agree with the judge that this “discharged the obligations of Cheyne under the CIFS Agreement and was not a discharge only up until the maturity date of the SDFP Note”. Paragraph 1 of the 2008 Letter Agreement was expressed in general terms. It provided for Blackstar to accept the Amortizing Note “as full and fair consideration for any and all Profit Sharing payable by Cheyne to Blackstar in relation to the LuxCo Investor in relation to the LuxCo Investment under the [CIFS] Agreement, now or at any future date” and for “Cheyne’s payment obligations to Blackstar in relation to the LuxCo Investor under the [CIFS] Agreement” to be “fully discharged by the issuance and transfer to Blackstar of the Note”. Nothing was said in this agreement, unlike the 2009 Letter Agreement, to indicate that Cheyne’s obligations were being discharged only until the Amortizing Note’s final maturity date. Moreover, it is abundantly clear that the fee entitlement that Blackstar was exchanging for the Amortizing Note was that relating to ARRCO’s €220 million investment.

As I have mentioned, the judge thought that her conclusion carried with it the implication that “LuxCo Investor” and “LuxCo Investment” were “not to be read as limited to HDFP and the investment made by HDFP in the Cheyne funds”. Having regard to paragraph 3 of the 2008 Letter Agreement, the judge said at paragraph 106 of her judgment:

“To apply a literal meaning to the ‘LuxCo investor’ and ‘LuxCo investment’ would have the result that the CIFS Agreement would remain in force in relation to ARRCO as it would fall within the definition of ‘any Investor other than the LuxCo Investor’ and would thus appear to give Blackstar an entitlement to fees under the CIFS Agreement in relation to ARRCO notwithstanding the issue of the Amortising Note and the payments which would be made to Blackstar through the Note in respect of fees due to Blackstar.”

As can be seen from paragraph 107, the judge further considered that taking the CIFS Agreement and the 2008 Letter Agreement together:

“would suggest that as a matter of construction the reference to the ‘LuxCo investment under the [CIFS Agreement]’ [emphasis added] must be a reference to the deal described under ‘Existing Deals’ namely the programme established for ARRCO and for the purposes of the 2008 Letter Agreement this must be construed as the investment under the CIFS Agreement”.

Mr Berry took issue with these remarks. Taken together, he said, the CIFS Agreement and the 2008 Letter Agreement amounted to complementary contractual definitions of the essential identity of the particular investment covered by the “Existing Deals” section of the CIFS Agreement, namely, that it was both “through [SDFP]” and “by [HDFP]” “pursuant to the LuxCo Agreements”. Moreover, the fact that the 2008 Letter Agreement left Blackstar able to claim fees under the CIFS Agreement in relation to new investments by ARRCO was not a problem but just a reflection of the

“Profit Sharing” part of the CIFS Agreement. The true position, Mr Berry argued, is simply that the “LuxCo Investor” was HDFP and that the “LuxCo Investment” was that made by HDFP via the specified “LuxCo Agreements”.

In my view, Mr Berry was right about this. Read naturally, the 2008 Letter Agreement provided for “LuxCo Investor” and “LuxCo Investment” to refer respectively to HDFP and the investment made pursuant to the “LuxCo Agreements”, and there is no good reason to attribute a broader meaning to either expression. As Mr Berry pointed out, there is no difficulty about taking “LuxCo Investment” to refer to both the investment effected pursuant to the “LuxCo Agreements” and that made “with a seven … year maturity … through [SDFP]” as mentioned in the “Existing Deals” section of the CIFS Agreement: they were one and the same. Again, paragraph 3 of the 2008 Letter Agreement does not require “LuxCo Investor” or “LuxCo Investment” to be given an expanded meaning. On the one hand, it is perfectly plain, reading paragraphs 1 and 3 of the 2008 Letter Agreement together, that Blackstar was not to be entitled to double payment, from Cheyne (under the CIFS Agreement) as well as from Holdings (under the Amortizing Note). On the other hand, it makes sense for Blackstar to have retained its entitlement to fees from Cheyne in respect of any investment other than the €220 million tranche.

Mr Ashworth relied on the 2008 Letter Agreement’s reference to “Profit Sharing” as indicating that it had not been drafted with precision. The term “Profit Sharing”, Mr Ashworth said, was used in the CIFS Agreement to denote fees that would be payable in relation to new introductions, not those for the “Existing Deals”. However, the MOU used “Profit Sharing” to refer to Blackstar’s fee entitlement generally, and the provision in the CIFS Agreement by which Cheyne undertook that it would “not make any asset allocation decisions for the purpose of reducing any Profit Sharing due to Blackstar” arguably extends to the “Profit Sharing” in respect of “Existing Deals” carried forward into the CIFS Agreement. Even assuming, however, that the expression “Profit Sharing” was used loosely in the 2008 Letter Agreement, that could not, to my mind, make it right to give broader meanings to “LuxCo Investor” and “LuxCo Investment”.

Mr Ashworth also placed reliance on the recital to the 2009 Letter Agreement set out in paragraph 13 above (in particular, the words “up until the final maturity date of the Note”). This, he argued, involved an acknowledgment that the Amortizing Note was to serve as consideration for amounts payable to Blackstar only “up until the final maturity date of the Note”. However, Mr Ashworth did not suggest that the 2009 Letter Agreement had either varied the 2008 Letter Agreement in this respect or given rise to an estoppel. Moreover, the parties’ subsequent conduct cannot generally be used to interpret a written agreement (see Lewison, “The Interpretation of Contracts”, 6^th ed., at 179). In any case, the recital to the 2009 Letter Agreement can potentially be explained, not on the basis that the parties never intended the discharge effected by

Turning to the 2009 Letter Agreement, paragraph 1 of this provided for Cheyne to have payment obligations to Blackstar “in relation to the extended LuxCo Investment” “[i]f the LuxCo Investor extends the term of the LuxCo Investment beyond the final maturity date of the [Amortizing] Note (December 31, 2013)”. In the event, the “LuxCo Investment” was plainly extended to 31 March 2014, with the result that Blackstar became entitled to fees up to that point. Mr Ashworth, however, submitted that Blackstar’s right to fees continued after that. His arguments depended in large part on the proposition that “LuxCo Investor” and “LuxCo Investment”, as used in paragraph 1 of the 2009 Letter Agreement, have to be taken to refer to ARRCO and its €220 million investment. In my view, however, there is no more reason to read “LuxCo Investor” and “LuxCo Investment” in that expansive way here than with the 2008 Letter Agreement. The expressions are defined in the 2009 Letter Agreement to refer respectively to HDFP and to the investment made by HDFP pursuant to the “LuxCo Agreements” (i.e. the Portfolio Management Agreement and Portfolio Advisory Agreement of 22 December 2006), and those definitions are not obviously inapt or contrary to “business common sense” (for the significance of which, see Wood v Capita Insurance Services [2017] UKSC 24, [2017] AC 1173, at paragraphs 10-14). It follows that Blackstar’s fee entitlement will have come to an end on 31 March 2014 unless HDFP’s investment pursuant to the “LuxCo

I do not think it can. The French Restructuring which took place at the end of March 2014 meant that HDFP dropped out of the picture and money ceased to be invested pursuant to the “LuxCo Agreements”. While money may still have been invested in the same underlying assets, there was a new and distinct structure. Since FCP has no legal personality, ARRCO was now in effect investing direct, not via SDFP, HDFP or any other special purpose vehicle, with LLP acting as Darius’ “delegatee” and managing the funds “under the control of [Darius]”. At trial, Mr Kartalis accepted in cross-examination that Darius could veto investments and had a responsibility to monitor investments made by LLP. Two of the features which Mr Kartalis identified as belonging to the “‘holy-grail’ in alternative investment management” (viz. “such a long term commitment” and “complete discretion and flexibility” – see paragraph 6 above) had gone.

Mr Ashworth pointed out that the CACEIS certificate was not given until 16 April 2014 (see paragraph 18 above). It followed, he argued, that HDFP was still involved with the investment structure after 31 March and that, for that reason, the French Restructuring represented an extension of the “LuxCo Investment” for the purposes of paragraph 1 of the 2009 Letter Agreement. Blackstar was therefore, he submitted, entitled to fees for as long as the arrangements put in place in the French Restructuring continued.

I cannot accept this contention. The fact that the CACEIS certificate was not issued until 16 April 2014 may well have prevented the novation of the portfolio swap and its unwinding from taking final effect before then. That, though, would mean that the French Restructuring had not been completed before 16 April, not that HDFP had any role in the new structure. In any case, there can be no question of Cheyne’s obligations to Blackstar under paragraph 1 of the 2009 Letter Agreement outlasting HDFP’s involvement. Even supposing, therefore, that HDFP could be said to have been involved until 16 April, Blackstar’s entitlement to fees must have come to an end at that stage, and we were told by Mr Berry that no fees would in practice have become due in respect of the 16-day period between 31 March and 16 April.

In short, I agree with the judge that Blackstar’s entitlement to fees did not survive the French Restructuring.

Blackstar’s case is founded on the “Fee on Existing Deals” section of the CIFS Agreement. As can be seen from paragraph 8 above, this stated that ARRCO’s €220 million investment “currently produces a management fee rebate to Blackstar of

Mr Berry, on the other hand, maintained that Blackstar’s construction of the “Fee on

Moulder J concluded in paragraph 77 of her judgment that the “fees due to Blackstar in respect of the ARRCO Investment are … those due under the MOU which provided that:

The judge had said this earlier in her judgment:

“67.

In my view the language of the clause, for the reasons discussed above, clearly supports a conclusion that the reference to 1.39% and 0.54% was merely a statement as to the position at the time the CIFS Agreement was entered into. That reflects the natural meaning of the words ‘currently produced’ and ‘currently equivalent to’. The fact that the contract was drafted internally and only reviewed (for Blackstar) by external lawyers on an informal basis tends to support a conclusion that the natural meaning of the language is the correct objective interpretation. As discussed above, the other provisions of the contract support this conclusion as does the commercial context.

68.

Accordingly, I find that the objective meaning of the language in the CIFS Agreement under the section ‘Fee on Existing Deals’ is that the 1.39% management fee and 0.54% incentive fee was a statement of what the fee arrangements currently produced at that time and was not a fixed entitlement to 1.39% and 0.54% of NAV [i.e. net asset value].”

In my view, the judge arrived at the correct conclusion.

First, and crucially, the words “currently produces” and “currently equivalent to” are not apt to impose an obligation to pay. Read naturally, they merely described a state of affairs. They did not obviously import any promise on Cheyne’s part.

Secondly, Blackstar has not provided a satisfactory explanation for the reference to the 1.39% and 0.54% being “subject to changes in performance”. While “changes in performance” could doubtless affect net asset value, and so the size of Blackstar’s fees, it is hard to see how they could be thought to bear on the percentages of net asset value to which, on Blackstar’s case, it was entitled. Further, there was nothing in the CIFS Agreement to explain quite how and to what extent “changes in performance” could have an impact.

That leads to a third point: that the CIFS Agreement provided no explanation, either, of how “changes in … allocation” could be significant. The judge summarised Blackstar’s case in this respect as follows in paragraph 45 of her judgment:

“The fee could vary if the total percentage management fee or total percentage incentive fee received by Cheyne was higher or lower than the percentage amounts being received by Cheyne at the date of the CIFS Agreement where such change was due solely to the making of a reallocation decision by Cheyne. In those circumstances the annual fee entitlement [of] Blackstar would be adjusted up or down in the same

proportion.”

However, the CIFS Agreement neither specified that Blackstar’s fee entitlement was to be adjusted “in the same proportion” as Cheyne’s own fees had altered nor spelt out any other mechanism for re-calculating Blackstar’s entitlement.

Fourthly, evidence given by Ms Cynthia Cox, Cheyne’s general manager, suggests that the approach espoused by Blackstar would have been uncommercial. When it was put to Ms Cox in cross-examination that it would be very easy to work out what Blackstar’s fees would be if expressed as a percentage of net asset value, she replied:

“sorry, with all due respect, that would be a nightmare… You can’t just establish that and then back into the individual ones.

It is just not how any fund manager works… At least that’s not how Cheyne works… It is just not how we have ever done anything…”

The grounds of appeal do not include a challenge to that evidence, which the judge considered “significant” (see paragraph 64 of the judgment).

Fifthly, the “Other” section of the CIFS Agreement fits Cheyne’s case better than

Sixthly, I do not think that Blackstar is helped by evidence which, Mr Ashworth argued, shows that the purpose of the CIFS Agreement was to create a greater degree

In the circumstances, like the judge, I do not consider that the CIFS Agreement gave Blackstar a fixed entitlement to the percentages of net asset value mentioned in the agreement.

I would dismiss the appeal.