Setterwalls’ client Erste Bank has successfully defended itself against a billion crown claim

Setterwalls has represented Austrian Erste Bank, the respondent in an arbitration against Sparbanksstiftelsernas Förvaltnings AB, following a claim for more than one billion SEK after a previous transfer of Swedbank shares from Sparbanksstiftelserna. “We are very pleased with the outcome”, says Åke Fors and Johan Strömbäck and goes on to sat that: “It is of course satisfying when an arbitral tribunal awards the client full success. The award confirms that it is fully acceptable for a pledgee to purchase the pledged property”.

The arbitration was a result of the heavy borrowing that Sparbanksstiftelserna, through Sparbanksstiftelsernas Förvaltnings AB, had engaged in during 2007 and 2008 to facilitate the purchase and subscription of new Swedbank shares in order to protect its position as the controlling share holder in Swedbank (one of the four largest Swedish banks). One of the lenders was Austrian Erste Bank which lent SEK400 million. The collateral for the loan consisted of shares in Swedbank which were pledged in favour of Erste Bank. When the financial crisis hit Swedbank the value of its shares dropped which consequently also had a major impact on the value of Erse Bank’s collateral. At a time when Sparbanksstiftelserna could not post additional collateral, or repay the loan, it was agreed between Sparbanksstiftelserna and its major lenders, including Erste, that the lenders would purchase the pledged Swedbank shares in consideration for the set-off of the loan. Through this agreement Sparbanksstiftelserna lost close to all of its holdings in Swedbank.

Several months later Sparbanksstiftelserna approached Erste and claimed that the purchase violated mandatory Swedish law. Sparbanksstiftelserna argued that the agreement violated the prohibition on forfeiture of pledges (stemming from section 37 of the Swedish Contracts Act). Sparbanksstiftelserna requested that the transaction should be rescinded and that Erste Bank should hand over the Swedbank shares, then equivalent to a value of more than SEK one billion. The arbitral proceedings resulted in an award which confirmed that the parties’ agreement and Erste Bank’s actions did not violate any applicable legal principle or law. “It is of course regrettable that Sparbanksstiftelserna had to face this unfortunate situation, but it could not be attributed to our client” says Johan Strömbäck. “There are always risks associated with financing through loans and the posting of collateral. The risk naturally increases when the value of the security fluctuates, as is the case with listed shares.” says Åke Fors.

Lastly it can be concluded that the award sheds further light on the concept of forfeiture of collateral under Swedish law and provides important input on how to best deal with collateral under Swedish law.