Option exercise disputes often appear deceptively simple. Was an option exercised or not? As per the old saying, in theory, there is no difference between theory and practice. In practice, there is.
Options can be tailor-made OTCs with complex clauses. The legal environment and procedural aspects may also be critical, especially when reconstructed a posteriori.
The U.S. District Court for the Southern District of New York just vacated a binding JAMS arbitration relating to the exercise of such an option. This case, already under public spotlight, has broader implications for attorneys, litigators and financial professionals alike.
The cause of the dispute
The dispute refers to a contractual agreement, where Levona, a company owned by Murchinson advised hedge funds, purchased ships via their holding companies, and offered a loan to Eletson, a Greek shipping company and the ships’ owner, in consideration for an option for Eletson to repurchase Levona’s shares.
The contract explained the mechanics of exercise for the repurchase. It also required that the loan be reimbursed or secured, that conditions on the ship valuations be met, as well as deadlines.
The shipping company asserted that it fulfilled the requirements and had exercised that option. Levona asserted that it had not, and therefore remained the shareholder.
The shipping company kept on managing the ships, ignoring transfer requests. Levona litigated to assert the operational and legal control of the ships.
The JAMS arbitration
Levona argued that there was imprecision in the shipping company’s documents, intent, procedures, and little to demonstrate the exercise. The shipping company’s attorneys and their expert muddled with the water. Both sides debated the facts and the meeting of the minds, and which document supported what.
The arbitrator, a retired state court judge, ultimately concluded that the shipping company had exercised the option. The damages were substantial. They extended to parties that were not involved in the arbitration.
The follow-up and bankruptcy
The follow-up and bankruptcyLevona petitioned to vacate the award.
Eletson then fell into bankruptcy.
According to the 138-page court opinion, the shipping company aggressively resisted discovery during that bankruptcy. Discovery was eventually compelled. Internal emails showed that the company knew that it had not exercised the option. They had simply not disclosed the information to JAMS, despite the procedural rules!
The discovery also demonstrated that the shipping company had created false argumentative constructs after the facts. Even worse, its principals had provided false testimony under oath, and that its attorneys had unduly hidden critical information under attorney privilege.
The court’s opinion
In its court opinion, the court judge concluded that the JAMS award had been obtained through false testimony and withheld documents, and that the factual premises for JAMS could not support its conclusion.
Central to the ruling was the determination that the contractual purchase option at issue had not been exercised as per the terms of the contractual agreement. Multiple elements impacted the conclusion: effective repayment, presence of exercise notices, shared information, valuation of the ships, cash consideration and deadlines. All these elements, critical to the mechanics of the exercise and explicitly described in the contract, were missing.
Key issues for attorneys
Practical lessons to remember from this multi-year saga include:
- Arbitration and court proceedings rely on discovery and testimonies. When documents are unavailable, narratives become prominent.
- A case or its discovery can have a material effect on another litigation.
- We have a tendency to conflate economic incentives with facts. “Of course they would have exercised; it was their economic interest.” may only be valid retroactively. Exercise is a process, not a state of mind.
- Even if they are binding, arbitrations can be vacated for fraud or material concealment under the Federal Arbitration Act. It is extremely rare, though.
- Attorney-client privilege can be lifted under the crime-fraud exception.
- Levona certainly took a challenging road. Levona deserves a tip of the hat for its resilience and the successful outcome. Its attorneys (Quinn Emanuel) share the merits as well
Complex financial instruments demand disciplined analysis grounded in documents, timelines, and market mechanics. Narrative is not a substitute for execution.
Disclosure
DisclosureNavesink International was retained in the JAMS arbitration to provide independent expert analysis on the contractual structure and mechanics of the derivatives, including whether it had been exercised.
After a review of the prerequisites and process set out in the governing agreements, we concluded that the option had not been exercised.
References
- Bloomberg Law: Murchinson Erases $100 Million Loss Linked to Arbitration Fraud
- Court Scrutinizes Allegations of Fraud in $102 Million Arbitration Case Involving Levona and Eletson – Legal News Feed
- Circuit Court Vacates an Arbitration Award after NFL Agent’s Fraud – International Institute for Conflict Prevention & Resolution, Inc
- Eletson bankruptcy judge hands shipping company and Reed Smith latest blow as Chapter 11 plan progresses – Financial Regulation News
- The court case is Eletson Holdings, Inc. v. Levona Holdings Ltd., No. 1:23-cv-07331 (LJL) (S.D.N.Y.). RECAP docket: https://www.courtlistener.com/docket/67792409/eletson-holdings-inc-v-levona-holdings-ltd/
- Information on the JAMS arbitration can be found at https://jusmundi.com/en/document/other/en-eletson-holdings-inc-and-eletson-corporation-v-levona-holdings-ltd-the-parties-statements-of-undisputed-material-facts-friday-22nd-december-2023