Terra Firma founder and chairman Guy Hands is set to take the stand this morning in the High Court in London as the trial of Terra Firma Investments v Citigroup Global Markets and others continued.
The trial, in which the private equity firm alleges it was misled by Citigroup in its acquisition of record company EMI in 2007, began yesterday. The firm is seeking damages of £1.6 billion ($2.3 billion; €2 billion). Citi denies the allegations.
Legal teams for both sides laid out skeleton arguments in front of a packed courtroom on Tuesday. Lord Grabiner QC, representing Terra Firma and its funds, opened the proceedings with a measured and occasionally amusing three-hour walk through the firm’s claim. With a number of interjections and clarifications from the judge, Justice Burton, Grabiner described in detail the chronology of the auction process for EMI, its acquisition and the subsequent loss of Terra Firma’s stake when the bank took control of the company.
The Terra Firma case, which alleges three Citi bankers misled it into acquiring EMI, revolves around four separate instances of alleged misrepresentation: the “May Representations”, the “Auction Representations”, the “July Representations” and the “August Representations”.
At various points during these alleged misrepresentations, which occurred during either undocumented telephone conversations or face-to-face meetings, Terra Firma alleges it was misled by Michael Klein, then chief executive office of global banking at Citi who now runs M&A boutique M Klein and Co, David Wormsley, then head of Citi’s UK investment banking group, and Chad Leat, then Citi’s head of global credit markets.
Terra Firma claims that Citi bankers gave Hands assurances that there was nothing to be concerned about regarding the health of EMI, when in fact the business was already – unknown to Hands – being monitored by Citi’s workout group, the “Institutional Recovery Management” team.
Terra Firma also alleges that Wormsley lied to Hands about the presence of another bidder in the auction process, Cerberus Capital Management, encouraged him to bid at a certain price and subsequently persuaded him to inject a further £205 million ($298 million; €262 million) of equity into the business.
Given that much of case rests on contradictory accounts given by Hands, Wormsley, Leat and Klein, said Grabiner, the judge will have to reach a decision based on motivations, primarily the fees that Citi would potentially make from the sale of EMI and subsequent advisory work, and the “probability” that the misrepresentations occurred.
Representing Citi, Mark Howard QC, outlined the case for the defence in under an hour, highlighting a number of key points from their “skeleton argument”. The first was that Citi, far from incentivised to push the deal through, was actually destined to lose $1 billion of the money it had lent to EMI (despite ultimately seizing the business).
Howard also painted a picture of Hands as a contrarian investor with “the pressure on him to invest and make super returns”.
“They have a war chest of money they have been given by investors that they have to invest,” said Howard, noting the fact that Terra Firma had missed out on the acquisition of UK pharmacy chain Boots earlier in the year and was going after EMI, which was “a big prize”.
Howard said that, if the information that Wormsley had given Hands about the pricing of the auction had been critical to his bid for EMI, as Terra Firma claims, then it was remarkable that it did not make it into any of the firm’s documentation at the time.
He also drew the court’s attention to Terra Firma’s approach to due diligence: “In Terra Firma’s prospectus, it boasted that it undertakes rigorous and proprietary due diligence, involving a deal team of at least eight internal professionals, as well as external advisers, an approval process and a system of checks and balances.”
Proceedings are expected to run until later this month.
This is the second time Hands has sued Citi over the investment in EMI. A case filed in New York in 2009 was overturned on appeal before it was transferred to London.