While Terra Firma Capital Partners will get a second chance to convince a jury it was tricked into paying too much for music publisher EMI, it's not at all clear if the Guy Hands-led firm has any better shot at convincing a jury it was a victim.
Terra Firma's job, though, may be a bit simpler than the first time around. The firm only has to convince a jury that Citi made misleading statements in relation to the sale of EMI, and not whether those alleged lies convinced the firm to bid for the company, according to an appeals court judge.
From the archives…
Two weeks after losing a £1.6bn equity investment in EMI, Terra Firma’s Guy Hands met PEI in his Guernsey office to discuss what he'd learned and how he intends to get Fund III ‘back to flat’. Click here to read the interview.
Judge John Walker ordered a retrial in Terra Firma's case against Citi, in which the firm accused the bank of tricking it into paying too much for the music publisher. A jury sided with Citi in the original trial in 2010, but Judge Walker said the jury received wrong instructions from the first judge, Jed Rakoff.
Rakoff had instructed the jury that Terra Firma had to prove it relied on “one or more misrepresentations” from Citi’s David Wormsley to make its bid for EMI when “such an instruction was inconsistent with English law and therefore was an error”, Judge Walker wrote in an appeals decision.
The instructions should have been simpler: the jury only had to consider whether Citi made any fraudulent misrepresentation related to the sale of EMI, and not if a misleading statement had led Terra Firma to submit a bid for the company, Judge Walker contended. During the retrial, Terra Firma will only have to convince a jury that Citi made a misleading statement to win its case.
Citi has disputed that legal test arguing that it wouldn’t be reasonable to bid billions of dollars on the statement of one outside advisor. Terra Firma countered that, under English law, if an alleged misrepresentation plays a “substantial” though not “decisive” part in the decision, that is still cause for loss regardless of how many other factors affect the decision.
Citi declined to comment further on its original statement that the bank is confident it would win any retrial as it believes “Citi’s conduct in the EMI transaction was entirely proper” and Terra Firma's accusations of fraud are “baseless”. Terra Firma believes its position has been strengthened as the “jury instructions [are] now resolved in our favour” and the firm “expect[s] to prevail in any subsequent trial”.
During the course of the original trial Hands accused his former “favourite” banker Wormsley of telling him Cerberus Capital Management was still bidding for EMI when in fact no rival firm was interested in making an offer. Citi attorney Theodore Wells argued that Terra Firma did not have any kind of documented proof of Wormsley lying and that the lawsuit had been filed as a way to make up for the struggling EMI investment.
Private equity lawyers speaking with PE Manager said jury trials on “he-said-she-said” cases (as Judge Walker called the EMI case) are often too difficult to predict as every jury differs. Some lawyers suggested that Guy Hands, head of Terra Firma, could find a jury more sympathetic to his arguments after having lost the case against Citi in 2010.
With a retrial granted, the upside for Terra Firma outweighs the legal costs and time commitments another round in court will bring, according to market sources. “For the sake of the cost of legal fees he has got another shot of recovering £1 billion plus. So the risk/cost is worth it,” said one UK-based lawyer.
Terra Firma stands to gain up to a maximum of £1.5 billion (€1.8 billion: $2.3 billion) in the retrial. However it's far from clear how the next court battle will turn out.
The EMI case has resulted in negative media coverage for Terra Firma, though sources believe any further reputational damage from a retrial would be limited. “Everyone already knows about EMI, losing the retrial wouldn’t do the firm any more harm,” according to one industry lawyer, who added a win would help the firm rebuild its brand.