SVB, Credit Suisse and UBS- The Role of a Commercial Lawyer in a Financial Storm

As a law student observing the events currently taking place in the financial services sector, it may be difficult to piece together all of the facts at first. However, I encourage anyone aspiring to become a commercial lawyer to explore this chain of events in depth as they are likely to shape market conditions in the near future. Furthermore, commercial lawyers have played a significant role in helping manage what some have called a ‘mini banking crisis’. Hence, a robust understanding of how law firms have approached the challenges in the last few months will give you a unique insight into the role of a commercial lawyer. In this article, I hope to share some of the ways in which lawyers across the UK and the globe may have been involved in assisting clients in these difficult financial conditions.

Context

Although I do not intend to produce an in-depth account of what has happened in the banking sector in the last few weeks, a brief recount of events is appropriate. On March 10, Silicon Valley Bank (SVB), a large regional bank in the US and a start-up favourite, collapsed as it became unable to meet deposit withdrawal requests. In more colloquial terms, this was a classic case of a ‘bank run’. Signature Bank, another major regional bank in the US also suffered a similar fate. For more information on how and why this happened, you can watch this informative video linked below.

As a result of SVB collapsing in the US, its UK-based subsidiary was also placed into an insolvency procedure whereafter it was acquired by HSBC for ￡1.

Not long after the news of SVB's collapse began to settle, the global markets were shook once more by the findings of Credit Suisse's (CS) annual report on March 14. It was said that there were 'material weaknesses' in the megabank's internal controls on financial reporting. Undoubtedly, this heavily damaged investor and depositor confidence. It also did not help that CS' largest shareholder, Saudi National Bank, publicly rejected the idea of injecting more capital into the bank. As the share price fell and credit default swap prices soared, the Swiss government and FINMA (the Swiss financial services regulator) brokered an emergency merger between UBS -another major Swiss bank- and CS. In the process, shareholder approval was bypassed and the holders of AT1 bonds saw their investment fully written down, resulting in an estimated total loss of $17.2 billion.

It was in this context that a range of clients would turn to firms such as Clifford Chance, Cleary Gottlieb and many others to advise them on related legal issues.

What role did commercial lawyers play in helping to address the challenges arising from these events?

Primary client exposure

It is safe to say that commercial lawyers across the globe were unlikely to have slept much over the last few weeks if their clients were directly impacted by this crisis. For example, in SVB UK's sale to HSBC, the latter called on a team of lawyers at Clifford Chance to advise them on the acquisition and the former relied on Slaughter and May's advice for the transaction.

Such a transaction required interdisciplinary advice to ensure its success. Aside from corporate lawyers advising on any elements of company law, it would have also been necessary for insolvency/restructuring and regulatory lawyers to assess the impact of the Banking Act 2009 (listen to this podcast from DLA Piper for more information on this) on the proposed structure of the transaction. Moreover, competition lawyers would have also been heavily involved in analysing whether this merger would have attracted any regulatory scrutiny and if so, how it should be dealt with. These are just some of the roles that you may expect a commercial lawyer to play in a situation like this.

In the case of the merger between UBS and CS, Freshfields was called on to advise UBS while Cleary Gottlieb and Sullivan & Cromwell advised CS on the transaction. It is likely that their corporate, regulatory and banking teams were involved in a similar way as described above. However, this merger caused some considerable controversy amongst AT1 bondholders that has prompted dispute resolution lawyers to get involved.

The first major complaint concerned the loss that AT1 bondholders were forced to shoulder as a result of the merger. It is argued by some that the shareholders, despite also being forced to crystallise a loss, should have totally absorbed CS' losses as opposed to the AT1 bondholders. Others have fired back, stating that the bond prospectus was clear regarding the rights of AT1 bondholders and that such an outcome was fair and reasonable in the circumstances. These complaints pushed Quinn Emmanuel to assemble a cross-border team to consider the possibility of representing the bondholders in challenging the write-down. It is expected that this will only be the first of many legal challenges to arise from this controversial merger.

Secondary client exposure

In addition to the parties that were directly exposed to the events above, there are several other parties who were indirectly impacted and may have required legal advice. These would have mainly included borrowers and depositors.

In the case of depositors, the news of SVB collapsing would have been extremely concerning considering that the Financial Services Compensation Scheme will usually only be able to guarantee ￡85,000 of any lost deposit in a bank failure. Additionally, even if it was to be found that the client had a valid compensation claim, it may take up to a week or more for them to receive any funds back. This sparked fears of cash-flow insolvency amongst depositors and solicitors worked around the clock to help clients organise alternative forms of finance in the event that SVB UK's acquisition did not pan out as expected.

In this situation, it is likely that corporate lawyers would have been involved in arranging emergency share issuances while banking lawyers may have advised clients on the merits of obtaining bridging finance to meet their interim needs. Regulatory lawyers would also have been considerably busy advising clients on issues relating to their deposit protection.

In the case of borrowers and syndicates involved with CS or SVB, it would also have been necessary to obtain advice from solicitors to determine how any live loans would be impacted by the change of control or insolvency of the respective lenders.

From these examples, it is clear to see how unpredictable the world of business can be and how that can impact the work of a commercial lawyer in practice. A simple jolt in the market could result in a client needing your assistance and therefore, this is something to anticipate should you be looking to become a Trainee in the future.

General advice

Although clients may not have been impacted directly by these events, many market participants still fear the possibility of contagion and the economic fallout that may ensue as a result. For example, in the US we have seen depositors moving their funds into larger banks such as JP Morgan Chase and Citigroup in the search for greater deposit security. Others have taken to money market funds to act as a temporary store for their previously deposited funds. This shift in the US market may be concerning for smaller banks that are losing depositors as their capital reserves may continue to be pressed in order to meet withdrawal requests. As a result, they may end up calling on regulatory lawyers to advise them on the best way to deal with the legal risks associated with this market pressure.

In addition, businesses may also turn to solicitors to give them general advice about how to hedge deposit risk and so that they may have some of their concerns about the current economic headwinds addressed. Most firms have put together dedicated teams to communicate with clients and some have even organised webinars to further inform them about the impact of the events in recent weeks.

I hope you took something away from this article and I highly encourage anyone looking to get into commercial law to read into this issue further. It is a great way to build on your commercial awareness and to gain a real insight into the legal industry. Feel free to reach out to me if you would like to discuss this article or any of the topics I've written about in more detail.