An investment fund, Forum Global Equity, agreed a deal over the
phone with US investment bank Bear Stearns. It agreed to sell debt
in troubled Italian food conglomerate Parmalat to Bear Stearns, and
contracts confirming the deal were due to be signed at a later
date.
Before they were signed, though, the Parmalat situation changed,
and the deal became far less favourable to Forum. It tried to pull
out of the transaction altogether.
Forum was selling notes of distressed debt issued by Parmalat
which would, under certain circumstances, translate into a share of
the company. The notes were bought after the company collapsed and
went into administration.
Forum acquired the debt soon after the company went into
administration, and it was later added to the official list of
creditors of the firm. The market for distressed debt is based on
the hope that the debt will translate into a share of any new
company that grows out of the administration process.
Forum agreed on the phone to sell the debt to Bear Stearns in
July 2005 after months of negotiations over price. They agreed on a
final price of €2.9 million.
In October 2005 the debt in question was converted into equity
in a new Parmalat firm arising out of the administration
proceedings. In that month Forum not only told Bear Stearns that it
was not prepared to go through with the sale, but began trading the
shares in Parmalat it had received as part of the administration
process.
The High Court case centred on whether or not the phone
conversation in July constituted a contract that was enforceable.
Justice Andrew Smith concluded that it did.
"I conclude … that Forum concluded a contract for the sale of
the notes on 14 July 2005," said Justice Smith in his judgment.
Justice Smith rejected Forum's arguments that an agreement that
others could fix a definite time for the transfer to take place
meant that no contract was agreed; that the agreement as a whole
was too uncertain to be an effective contract; and that the parties
did not intend to create legal relations.
The case was viewed with concern by the City in London, where
complex and extremely time-sensitive trades are conducted on the
telephone and treated as contracts, with the paperwork only being
finalised later. A victory for Forum could have undermined that
entire system.
