Burford Capital and the Case of the Missing Tender Offer
Imminent YPF-litigation events make $BUR a rare and attractive short-term bet
Before I begin, I need to give credit to—and thank—Yet Another Value Blog’s Andrew Walker for bringing this case to my attention.
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It’s good to be the king. It’s also good to be just about any sovereign entity.
Depending upon which sovereign entity you are, there are a number of benefits allotted to you that us mere mortals don’t receive. Here in the U.S., we plebs can’t sue the federal government without its consent. This is why, when you hear about civil rights cases, or federal eminent domain cases, or any case where you might assume the defendant is the government, you don’t actually see “John Smith v. United States.” Instead, you see things like “Alex Rivera v. Eric Holder, Attorney General of the United States.” The federal government is off limits, but we’ll gladly throw a federal government official under the bus.
Another big benefit is that the law of the nation reigns supreme. This is a big one for a lot of reasons. Here in the U.S., it means states can’t nullify the Constitution with their own laws. It also means that, as a private citizen, you can’t contract your way out of the Constitution (and no, crowning yourself king doesn’t change that).
The U.S. isn’t the only country with these “Supremacy” benefits. Just about every government has some sort of clause in their respective constitutional documents saying “When in doubt, this piece of paper wins.” One of these governments is Argentina. In fact, the Supremacy Clause in Section 31 of Argentina’s Constitution is pretty darn close to ours. I’m not going to say they plagiarized, but I’m also not going to say they didn’t.
At this point you might be saying “This is obvious! Tell me something I don’t know!” And that would be fair. “The Constitution wins” and “governments can do things you or I can’t do” are hardly profound statements. But things get a little fuzzy when federal governments do things that look like things you or I might do. Something like, I dunno… buy a company.
It turns out Argentina really likes to buy companies. We could debate whether or not a government should buy private assets til the Criollo cows come home, but the truth is that governments all over the world are no strangers to buying things from people without asking permission. The more acute problem is that Argentina isn’t a big fan of playing by the rules when it buys companies. Think of it as a “buy now, pay later” scheme where the “pay later” involves years of drawn out litigation in foreign jurisdictions presided over by judges interpreting laws they weren’t taught in law school.
That brings us to YPF.
YPF is a petroleum company, which was owned by the Argentine government until 1993. As a part of broader economic efforts, Argentina decided to privative (“privatize” as in “make it not government owned,” and not “can’t be traded in public markets”) YPF by conducting an IPO.
In order to maximize YPF’s exposure, Argentina arranged for shares of YPF to be listed on the in the U.S. on the NYSE via ADRs. But Argentina knew that listing, by itself, may not be sufficient. Investors were familiar with Argentina’s proclivity for purchases, and so Argentina had to do something to make investors feel more comfortable with buying these shares. Argentina chose to assuage investor concerns by amending YPF’s bylaws in two notable ways, specifically:
adding protections against hostile takeovers, and
adding protections against Argentina re-nationalizing the company.
Specifically, Section 7(d) of the amended bylaws stated that no entity could acquirer of 15% or more of YPF’s shares unless the entity makes a tender offer for all of the outstanding shares (at a price and pursuant to a procedure which was also spelled out in the bylaws). Section 7(f) mandated that any such tender offer would have to comply with the rules and regulations imposed by the governments and stock exchanges where YPF's shares are listed.
The IPO was a raging success, by most metrics. The ADRs listed on the NYSE raised over $1B alone. One entity, Repsol S.A., liked what they saw in the YPF IPO prospectus, and became YPF’s majority shareholder during the IPO. Two other entities—Petersen Energía and Eton Park Capital Management (both, with affiliates) also took notice. Over nearly two decades, Petersen and Eton Park gobbled up YPF ADRs. All seemed good.
In 2012, Argentina’s President—CFK (coincidentally now Argentina’s VP)—was recently elected to a second term, and Argentina’s populist roots grew deeper. CFK’s government was feeling seller’s remorse on the YPF deal, and quickly decided they wanted to exercise their sovereign “take backsies” power (not a real power, if that needed clarification). In the government’s eyes, the amended YPF bylaws were traffic cones, and Argentina was a steamroller. Discovery would later reveal that government officials reviled the bylaws as “unfair,” and a “bear trap,” and that complying with them would be, in short, “stupid.” Their recommendation to deal with this bear trap? Ignore it.
In May of 2012, Argentina passed the Expropriation Law. Pet. App. 10a law, thereby expropriating Repsol’s 51% ownership in YPF. The tender offer promised in the by-laws never came. The actual details of the expropriation look more like a coup of a small nation than a share purchase. Government officials ousted top YPF executives, escorted the YPF CEO off company premises, and announced on television that any minority investors expecting the tender offer would be “fools” to think Argentina had to comply with the by-laws it created for their protection. These are what Argentina’s lawyers might call “challenging facts.”
Petersen and Eton Park would completely divest of YPF shortly thereafter. Eton Park, by choice, while lenders foreclosed on Petersen’s ADRs. According to Argentine officials, such is the price of doing business with foreign governments and entities which they might acquire. Argentina is a sovereign nation, and when in doubt, the Constitution wins; it wins even if it means trumping Argentina’s own corporate laws. But the problem with Argentina’s theory of sovereignty is that the Argentine Constitution is not expressly at odds with the by-laws it wrote for YPF IPO. Nothing in the Argentine Constitution says Argentina couldn’t conduct a tender offer. Petersen and Eton Park had a colorable claim against Argentina for breach of contract.
Enter Burford Capital.
Burford has emerged in recent years as an elite litigation finance firm, albeit not without some controversy. It ponies up litigation fees to fund the legal battles in exchange for a portion of the proceeds (you might see articles saying median federal court litigation fees are $15,000-20,000, but you should add about 3 zeroes for a case like Petersen). For the top financing firms with relationships with top law firms, it can be extremely lucrative. After Petersen filed for bankruptcy, Burford swooped in to take over the claims. Its decision to do so is not based on a whim. Burford only loses cases it finances about 10% of the time.
Litigation finance is substantially different from other event-driven finance in a number of ways, but one in particular stands out: timelines to resolution in federal district courts routinely take years, making timing investments in the secondary market a tall task. This case is no exception.
Petersen originally filed this case in April of 2015, with the Southern District of New York exercising jurisdiction through the Foreign Sovereign Immunities Act and applying Argentine law (i.e., Judge Preska of the Southern District of New York is interpreting and applying Argentine law with the help of the parties’ counsel). Since then, the case has made its way up through the courts, just shy of the U.S. Supreme Court, and back down. The many interstitial rulings are too voluminous to get into in detail here, especially because Argentina has changed its litigation tactics more than once. At long last, the case is now in the final stages, with some notable events in the immediate future.
The parties’ cross-motions for summary judgment were filed back on April 14, 2022, with a ruling expected shortly after. For those unfamiliar, a motion for summary judgment asks the court to rule, as a matter of law, that there is no genuine issue of material fact, and that, no matter which way you slice it, the moving party has to come out on top. A judge granting summary judgment has to be confident that the factual contentions underpinning the legal claims are so clear cut, and so wholly undisputed, that there is simply no reason a jury should be involved. A low hurdle, it is not. Yet both sides here believe they are entitled to this extreme outcome.
So what is the hold up on a summary judgment ruling? Probably letting the ink dry on a very long judicial opinion. It doesn’t take 4 months to write “The parties’ motions for summary judgment are denied.”
Normally, I wouldn’t wait on a summary judgment ruling with bated breath. It is just as often a tool to preview your trial themes to the judge, or to show your client you mean business, as it is a serious litigation tactic. But this case is a decent candidate for summary judgment. The parties don’t dispute most of the facts at issue here. Those memos where Argentine officials blasted the bylaws are unquestioned in their authenticity. Even the damages can be proscribed based on the highest of four clearly defined, albeit somewhat lengthy and complex, formulae. The “Formula D” formula, which the parties agree is the highest of the four, is below*:
*And some people say the law isn’t riveting!
The meat and potatoes of the claims really is the law itself, on which Judge Preska is empowered to rule. Burford says the case is about a breach of contract. Argentina says the case is about Argentina law trumping corporate law, and about whether or not Burford has the right to litigate the claim at all. These are exactly the types of issues judges are comfortable resolving.
Indeed, Judge Preska has given some hints at a possible ruling. In her June 2020 ruling on a renewed motion to dismiss the Petersen claims, Judge Preska agreed with Petersen’s interpretation of the case, saying “[Argentina has] not made a compelling showing that any complicated questions of Argentine law will actually arise in what is, at its core, a case involving relatively standard factual allegations of breach of the YPF By-laws.”
So what does Burford Capital stand to gain from a ruling for Petersen? By Burford’s own estimates, quite a lot. Let’s call it anywhere from 50-250% of its current market cap, among friends. Suddenly those eight-figure litigation fees start to look a whole lot more reasonable.
It’s important to note that a Burford victory is anything but assured. And acknowledging Burford’s apparent edge doesn’t address every question a reasonable investor might have, namely:
Could Burford settle? Sure, but if you’re willing to fully brief summary judgment and sit around waiting on a ruling which could incinerate your position at any moment, you’re probably willing to go to the mat at trial if summary judgment doesn’t resolve all of the claims.
Could Burford lose on summary judgment or at trial? Absolutely. But Judge Preska understands the ramifications of this decision. Should Argentina prevail, Plaintiffs note in their combined opposition to Defendants’ motion for summary judgment, “the loser will not be Plaintiffs but every country that seeks to access U.S. capital markets.” This is because a ruling for Argentina could result in sovereigns being given a free pass to breach foreign contracts.
Could Burford win and not be able to collect? Theoretically, but Burford has thought of that—asset recovery is a core part of the Burford business. Argentina owns assets in the U.S., and elsewhere, which could be seized to pay the judgment. Are those assets worth billions though? Maybe not. Part of Argentina’s arguments are that a $19B USD judgment would be a devastating hit to the Argentina federal budget. Turns out international BNPL schemes may not be the best idea. It’s also hard to feel sorry for Argentina when you find out Argentina’s Energy Secretary at the time of the expropriation expressed concern that conducting a tender offer would cost Argentina “between 11 billion and 14.5 billion dollars.” It’s not like a multi-billion dollar judgment would be coming out of nowhere.
Are there any other risks to the judgment? How much time do you have? The biggest risk, in my mind, is the argument around the conversion rate. Even if Burford wins, it’s unclear if the judgment would be on the order of magnitude they project. It’s not that the formula for calculating the damages is unclear—it is. It’s a question of what conversion rate the court should apply to any damages if such damages are first calculated in Argentine pesos. Burford says to apply the conversion rate at the time Argentina should have made the tender offer. Argentina says the law clearly dictates that the conversion rate is the exchange rate at the time of a hypothetical judgment in the future. In most cases we’d be quibbling over a few bips, but not here. The below chart shows why the argument matters—the Argentine peso has declined over 90% relative to the continuously strengthening U.S. Dollar since the time of the promised tender offer:
Burford raises interesting points in its reply to Argentina’s opposition to summary judgment, but let’s first start with Argentina. Argentina claims that the American Depository Receipts (“ADRs”) Petersen bought via the IPO are “indirect” ownership instruments representing a “negotiable” interest in American Depository Shares (“ADSs”), which in turn represent shares listed in Argentina, and which cannot be redeemed in dollars. Regardless of these market mechanics, the entire distinction ignores the YPF IPO structure, which provided for U.S. dollar compensation for the ADRs in a variety of ways (e.g., dollar-denominated dividends). Argentina argues that, in any case, an exchange rate fixed on a future “judgment day” is supported by N.Y. Jud. Law § 27(b), which states that “In any case in which the cause of action is based upon an obligation denominated in a currency other than currency of the United States, a court shall render or enter a judgment or decree in the foreign currency of the underlying obligation.” This is a rather long way of saying that the judgment would be in pesos, and we’d convert at the current exchange rate on the day of judgment. Burford’s counter rests on two points:
N.Y. Jud. Law § 27(a)—importantly, the section before § 27(b)—says that judgments and accounts must be computed in “dollars and cents” unless the limited exception of 27(b) applies, and
Burford alleges that the language of 27(b) cannot apply because Argentina breached a performance obligation (specifically, the obligation to conduct a tender offer) rather than a payment obligation, and that performance obligations “cannot be denominated in anything.”
If you’re getting twisted, all I can say is that I don’t blame you. I’m going to dispel (1) quickly here. If you need to cite a “letter from Counsel for the State of New York Office of Court Administration to Counsel for the Governor,” as Burford has here, along with instructions for the judge on how to interpret statutes (check out Burford’s United States v. Texas, 507 U.S. 529, 534 citation on page 67 of its combined reply in support of their motion for summary judgment) chances are your precedent isn’t all that germane.
As for (2), we’re now getting into some fairly esoteric aspects of the law here, and much of this probably sounds like a distinction without a difference. What happens when the performance obligation is setting up a structure of, and executing, a payment? That’s more or less the situation we have here, and the case law doesn’t have a perfect answer. Fundamentally, while a tender offer might involve more steps than a simple payment, a tender offer is an offer for payment. The case to which Burford cites as precedent in support of the argument that this is a performance obligation looks pretty good (kudos to the Kirkland & Ellis junior associate that tracked that one down), but it may just be too attenuated to be convincing. The obligation giving rise to the judgment in that case was a termination right. My gut tells me Judge Preska will still side with Burford here, but that might just be the sushi I had for dinner.
If you’re not completely twisted, or deep in a slumber that would put Rip Van Winkle to shame, you might exclaim at this stage, “What is this ’N.Y. Jud. Law,’?? I thought we were applying Argentine law!?” And you’d be right to do so. Except that following a seminal case in 1938, an entire doctrine of law called the Erie doctrine emerged saying we apply procedural law of a forum state. The decision of what exchange rate we apply to a judgment falls squarely in the procedural bucket, as the interpretation and application does not affect the outcome of the case itself.
Before you go launching your life savings into $BUR call options, you should know that even Burford itself ascribes a substantially higher chance of loss than of winning. At a current estimated accounting value of $779mm based on Buford’s mid-year report, Burford ascribes about a 24% chance of victory (taking $3.2B to be the expectation value in the event of a favorable judgment). A ruling in Argentina’s favor on the conversion rate point alone would knock a zero off of Burford’s potential prize.
Given the chance of significant near-term upside, and relatively mitigated downside (I really just don’t see Argentina getting a wholesale win in the coming days/weeks, but I’ve been wrong before), $BUR is an interesting short-term bet here. The parties have agreed that, should there be issues to resolve following summary judgment, the trial will commence 115 days following the summary judgment ruling. It’s not overnight, but in the litigation world, that’s about as short a path to clarity as you’ll find.
Accordingly, I have taken a small “keep an eye on it” position in $BUR, and the September and January call options look interesting, though they are pretty thinly traded and the premium is high for my tastes at the moment. Absent a resolution of the claims, I will be looking out for any language in a summary judgment ruling regarding the conversion rate. As for any indication on when exactly a ruling on summary judgment might come, it looks imminent. Just today Judge Preska issued a ruling denying a non-party motion to file amicus briefs on the summary judgment issues. It would seem that the summary judgment opinion is, at the very least, well underway, and Judge Preska is not entertaining additional input.
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I'm admittedly not familiar with Argentine corporate law, but would be curious to know if there's a DGCL 109 equivalent in Argentina and the YPF Board could have just amended the Bylaws to eliminate the tender offer requirement. Bylaws aren't static, immutable documents. You would think to avoid bad PR, Argentina could have engaged in a Bylaw amendment struggle rather than saying "to hell with it" and going with the "take backsies" power route / ignoring the Bylaws.
That said, I'm guessing the YPF Board was actually independent and not infiltrated by Argentine loyalists, and that's why this wouldn't have helped in any case.
P.S. Impressive that you managed to work in another dig against Elon in par 3 despite moving to a new topic. Well played...