U.S. Judge Loretta Preska ruled against Argentina this Friday in the YPF expropriation payout trial. Although Preska’s ruling does not state how much Argentina will have to pay Burford Capital, estimates made by Argentina’s attorneys during the trial indicate that the amount could go as high as US$16 billion.
In her 25-page ruling, the judge agreed with Burford’s position regarding three key arguments discussed during the trial: the date in which the state effectively took over YPF, the interest rate the country should pay for the penalty, and the P/E ratio that determines stock value.
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This means that Preska believes that the state took control of YPF on April 16 and that the applicable interest rate is 8% — Argentina’s position is that May 7 should be considered as the starting date of its takeover, and that the interest rate should be 3%. The judge’s ruling also means that the highest P/E ratio proposed is the valid one.
Preska closed her ruling with the following conclusions:
- “The Courts finds that the Republic exercised indirect control over the requisite number of Repsol’s shares on April 16, 2012, thereby triggering its tender offer obligations”
- “The Court also finds that prejudgment interest of 8% simple interest is appropriate and that it should run from May 3, 2023”
- “The Court finds that Professor Fischel’s calculation of the tender offer price is correct and relies on the price/income ratio required by Formula D”
While Preska’s conclusions state May 3, 2023, this is an error and should read May 3, 2012.
Official sources told the Herald that Argentina is going to appeal the decision. Bob Giuffra, a partner of the US law firm Sullivan & Cromwell that is representing Argentina in the case, also confirmed an appeal is underway.
“The Republic respectfully disagrees with the district court’s unprecedented and erroneous decision and intends to appeal the verdict with the U.S. Court of Appeals for the Second Circuit,” Giuffra told the Herald.
“Today’s ruling on damages reflects the district court’s fundamental misunderstanding of governing Argentine law and exacerbates other serious errors of Argentine law that the court made in earlier stages of this case. This case over the rights of former shareholders of an Argentine company under the Argentine company’s bylaws does not belong in a U.S. court, particularly where governing Argentine law requires that such disputes over Argentine law should be decided by Argentine courts. No Argentine court has ever allowed former minority shareholders to bring a breach of contract action for money damages against another shareholder based on alleged violations of an Argentine corporation’s bylaws.”
Preska’s ruling means she agreed with Burford Capital’s argument that the reference date should be April 16, 2012, the day that the YPF takeover was published in the Official Bulletin.
During the hearings, Argentina’s lawyers argued instead that that date should be May 7, which is when the expropriation law — approved by Congress four days earlier — was published in the Official Bulletin.
The P/E ratio
The date is crucial because it determines which quarters should be taken into consideration to estimate net income and the price-to-earnings (P/E) ratio, two key components of the formula that determine share value.
There were also two important discrepancies: whether or not to take into account the last quarter of 2008 (which includes the impact of the international financial crisis on YPF’s balance sheet) and what P/E ratio would be used, given that the plaintiffs estimate it at 27.1 while Argentina places it in a range between 17 and 18.
Preska’s ruling said the higher P/E ratio should be used.
The interest rate
During the trial, Burford asked for an interest rate between 6% and 8%, given that they consider the situation a “forced loan.”
Argentina asked that interest be eliminated or, if imposed, that it be defined according to Argentine law. If the judge rules that Argentina should pay interest, the country’s lawyers offered estimates based on judicial decisions in Argentine courts and said that the rate should be, at most, 3.04%.
Preska sided with Burford and decided the interest rate should be 8%.
The amount of the penalty
Although Preska didn’t state any monetary amounts, she did give the parameters that must be used to define the final penalty.
The judge ruled that April 16 be taken as the reference date and that the interest rate is 8%, which means Argentina will have to pay close to US$16 billion.
Argentina, on the other hand, requested May 7 be used as the reference date and a 0% interest rate. Under these conditions, the country would have paid US$ 4.9 billion.