In Fir Tree Capital Opportunity Master Fund v. Anglo Irish Bank Corporation Limited (November 28, 2011), the US District Court for the Southern District of New York held that Anglo Irish Bank (AIB), which was nationalized by the Irish government in 2009, was entitled to sovereign immunity as a “foreign state” under the US Foreign Sovereign Immunities Act (the FSIA), even though the financial instruments in dispute in the case, which were entered into by AIB prior to its nationalization, expressly provided for AIB’s submission to New York jurisdiction. The decision, which is on appeal to the Second Circuit, raises questions about the risk of investing in foreign businesses that may be prone to nationalization, and it may ultimately impact the cost for foreign borrowers to raise capital in the United States.


In Fir Tree, two institutional investors, organized in the Cayman Islands and operating in the United States, purchased $200 million in private placement notes issued by AIB in 2005. The indentures for the notes were governed by New York law and expressly provided for AIB’s submission to the jurisdiction of the New York courts. In 2009, following AIB’s nationalization, the Republic of Ireland sought to liquidate AIB’s US assets and merge AIB into another financial institution, which the investors claimed was a violation of various provisions of the indentures. The investors sought injunctive relief in the New York district court to prevent the liquidation and merger, but the court dismissed the action on the grounds that AIB (now wholly-owned by the Irish government) had sovereign immunity and, accordingly, the court lacked jurisdiction.

The FSIA generally provides that a foreign state is presumptively immune from the jurisdiction of US courts. A foreign state may include an entity, such as a commercial bank, that is majority-owned by a foreign government. Such sovereign immunity may be waived by the foreign government, or a “commercial activity” exception may apply.

In Fir Tree, the New York court held that, notwithstanding the indenture provisions relating to governing law and submission to jurisdiction, only the Irish government could waive its rights under the FSIA; accordingly, because AIB was a private company (and not a foreign state) at the time that it entered into the indentures, the jurisdictional provisions therein did not function as a waiver of sovereign immunity by the Irish government. The court further found, in a narrow reading of the FSIA, that the investors, by virtue of their organization under the laws of the Cayman Islands (and despite their US operations), were not entitled to claim the benefits of any treaty between the United States and the Republic of Ireland that may have been applicable.

The FSIA further provides a commercial activity exception, which is intended to prevent foreign governments from hiding behind their sovereignty when acting as participants in US markets. But the New York court did not find any such exception in Fir Tree. While AIB was undisputedly carrying on commercial activity in the United States prior to its nationalization, the court held that the pre-nationalization activities of AIB could not be applied to the Irish government, and that the government’s actions in selling assets and pursuing a merger did not, in themselves, rise to the level of commercial activity in the United States.


The Fir Tree decision reflects a strong preference by the court to uphold sovereign immunity under the FSIA. If upheld by the Second Circuit (a decision is expected in the autumn of 2012), the threat of sovereign immunity through nationalization – and the resulting inability of US investors to seek remedies and enforce deal terms in US courts – would increase the risks of US investment in foreign entities. This result, in turn, would likely lead to higher costs of capital for foreign borrowers and issuers. Because the decision raises doubts that a private party could effectively waive sovereign immunity on behalf of any subsequent government owner, financial institutions may benefit from reviewing their foreign investment portfolios and considering amendments to relevant documentation to provide for events of default to occur upon the nationalization of foreign obligors that seem particularly at risk.

For more information about the topics raised in this Legal Update, please contact Douglas A. Doetsch at +1 312 701 7973, David K. Duffee at +1 212 506 2630 or Will Walker at +1 704 444 3696.

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