SPEED READ

On 28 February 2013 Lehman Brothers International (Europe) (in administration) (LBIE) issued the terms of a consensual proposal to provide a solution regarding the return of LBIE's customers' property that is currently held by the U.S. Lehman entity, Lehman Brothers Inc. (LBI) (the Proposal).

This development will only be relevant to customers of LBIE with claims in relation to securities and/or cash positions which are recorded in LBIE's books and records at the time LBIE entered into administration as being held for the benefit of such customers by LBI (Customers with an LBI Asset Claim). Such customers have until 26 March 2013 to make their decision on whether or not to vote in favour of the Proposal. While there is no obligation to vote we strongly urge affected clients to do so. Importantly, if you take no action you may still find yourself bound by the terms of the Proposal, which would include being bound by LBIE's valuation of your LBI Asset Claim.

We wish to make you aware of the Proposal. However, this bulletin does not constitute legal advice on: (i) whether the Proposal is relevant to you; (ii) whether it would be beneficial for you to accept the Proposal; or (iii) the detail of the Proposal's terms, as advice can only be given on these questions on a case-by-case basis. Any information on the Proposal contained in this bulletin is given in generic terms only and clients with specific concerns should contact Allen & Overy for advice.

BACKGROUND

Claims in LBIE's administration can broadly be split into three categories: (i) unsecured claims; (ii) client money claims; and (iii) client asset claims. The Proposal relates to the third category of claims. Such claims arise in relation to assets which were recorded at the time LBIE entered into administration as being held by LBIE (or a relevant sub-custodian) for third parties separately from LBIE's own assets. Where these assets were held by LBIE (or unaffiliated custodians), clearing systems, depositories or nominees rather than elsewhere within the Lehman group of companies, LBIE has to a large extent managed to recover and return those assets to its customers through the claims resolution agreement (the CRA) or, for those customers that did not sign up to the CRA, through other bilateral processes. The CRA is essentially a standard agreement to govern the return of client assets to LBIE's customers - for information on the CRA click here. However, the return to LBIE of assets sub-custodied with LBI (and then the distribution of those assets to LBIE's own customers) has been prevented by a number of issues generated mainly by LBI's U.S. liquidation proceedings. This has been one of the key issues causing the delay in the return by LBIE of its customers' property.

On the 27 February 2013 a settlement was reached between LBIE's administrators and LBI's trustee (the Settlement Agreement) which will allow LBI's trustee to allocate and distribute cash and securities to LBIE in respect of those assets it held in custody for LBIE (the LBI Distribution). As there is a material mismatch of the securities that will be recovered from LBI pursuant to the Settlement Agreement compared to those due to Customers with an LBI Asset Claim, LBIE has stated that it is not in a position to return like for like securities to such customers. Therefore, LBIE intends to liquidate the securities with the realised proceeds being added to the cash received from LBI. These proceeds will then be allocated to Customers with an LBI Asset Claim. It is proposed that an allocation from this fund will be made to Customers with an LBI Asset Claim via a consensual contractual agreement. It is this agreement that the Proposal seeks to effect.

THE PROPOSAL

The Proposal is split into two separate categories: one to cover Customers with an LBI Asset Claim who signed up to the CRA and one to cover Customers with an LBI Asset Claim who did not sign up to the CRA. Each avenue seeks to deal with Customers with an LBI Asset Claim in materially the same manner, although the process and documentation differs between the two. For CRA signatories, the Proposal takes the form of amendments to the CRA. For non-CRA signatories the Proposal takes the form of a separate agreement – the Omnibus Settlement Agreement (or OSA); broadly voting in favour of the Proposal results in an offer to LBIE from the non-CRA signatory to be bound by the terms of the OSA.

Under the Proposal each Customer with an LBI Asset Claim will be entitled to have allocated to it (subject to deductions) a share of the cash and the proceeds of sale of the securities received in the LBI Distribution. The allocation will be made rateably as between Customers with an LBI Asset Claim on the basis of each customer's Best Claim. The Best Claim is the greater of the value of the customer's LBI Asset Claim against LBIE on the 19 September 2008 (the date LBI went into the SIPA process in the U.S.); or the aggregate market value of the customer's LBI Asset Claim against LBIE on the 30 November 2012 (being the last date prior to the date of making the Proposal on which the LBI Asset Claims of all customers could be valued by LBIE).

The LBI Distribution will be held by LBIE on trust for all Customers with an LBI Asset Claim. Customers with an LBI Asset Claim who become bound by the Proposal will not have a proprietary interest or be entitled to receive any specific security (or the proceeds of realisation of any specific security) from the LBI Distribution. By agreeing to the Proposal, Customers with an LBI Asset Claim will be consenting to the liquidation of the LBI Distribution and the fund's conversion into U.S. dollars (with distributions being made in U.S. dollars). Distributions will be subject to deductions to reflect, among other things: (i) amounts owing to LBIE (and certain other third parties); (ii) amounts that the customer has agreed to pay LBIE; (iii) LBIE's costs; and (iv) amounts in respect of taxes. Reserves will be made for those Customers with an LBI Asset Claim who are not bound by the Proposal (essentially those non-CRA signatories who did not vote in favour of the Proposal).

In the event that there is a shortfall in the amount returned to a Customer with an LBIE Asset Claim, as against the customer's claim valued on 19 September 2008, that customer will have an unsecured shortfall claim against LBIE for the difference. If the customer has an outstanding amount owing to LBIE then this will be set off against the shortfall claim (without any cap). Any excess of the shortfall claim over and above the amounts due to LBIE will be a provable, unsecured claim of the customer against LBIE provided that the aggregate of all such unsecured shortfall claims is capped at US$200 million (after the application of set-off).

Once bound by the Proposal the Customer with an LBI Asset Claim will release all claims against LBIE and LBIE's administrators (in so far as the claims concern LBI Assets, the LBI Distribution and the fund that results from that distribution). Claims will also be released against LBI, to the extent they duplicate claims against LBIE in relation to assets held by LBI. It is important to note that claims made directly against LBI for the return of assets may be expunged pursuant to any U.S. court order approving the settlement agreement even if the customer does not vote in favour of the Proposal.

Voting on the Proposal will be carried out through the LBIE electronic creditor portal. If clients experience any difficulties in this regard, they should contact: generalqueries@lbia-eu.com.

The Proposal will only become binding if certain conditions are met. These include the following approvals of the Proposal by Customers with an LBI Asset Claim:

• in respect of CRA signatories: 75% by voting value (voting value will be calculated by reference to the customer's entire CRA position which will be different to the customer's Best Claim); and
• for non-CRA signatories: 40% by value (calculated by reference to non-CRA signatories' Best Claims).

Secondly, the Proposal is conditional upon the Settlement Agreement becoming fully effective, which, among other things, will need the approval of both the U.S. and English courts. In addition, in order for the Settlement Agreement to become effective, LBI must be able to show that it will be able to make a 100% distribution in respect of all of its customer claims. You should therefore be aware that, even if you vote in favour of the Proposal, this does not necessarily mean that you will eventually be bound by it.

LBIE will be holding "town hall" style meetings which will take the form of a question and answer sessions in London on 14 March 2013 (anticipated time - 2pm London time) and in New York on 19 and 20 March (anticipated time - 10.30am on each day New York time).

TIMELINE

If you intend to vote on the Proposal you must do so by 26 March 2013 (5pm New York time). If you are a non-CRA signatory LBIE has 28 days from the 26 March 2013 to decide whether to allow you to benefit from the Proposal. The conditions for full effectiveness of the Settlement Agreement must currently be met (or waived) by 21 August 2013.

WHAT YOU NEED TO DO?

Clients who are Customers with an LBI Asset Claim should ensure that they have received an information pack concerning the Proposal from LBIE through LBIE's electronic creditors' portal. The information pack should include LBIE's statement of the customer's Best Claim and the value assigned for voting purposes. If you believe that you are a Customer with an LBI Asset Claim and you have not received an information pack you should contact LBIE's administrators immediately. The best person to contact would be your LBIE claims handler. It is possible that, if you intend to vote in favour of the Proposal, you will, at the same time as voting, need to supply the relevant completed US tax forms to LBIE.

If you are a Customer with an LBI Asset Claim there is no obligation for you to vote on the Proposal. However, if you are a Customer with an LBI Asset Claim and have signed up to the CRA, you will be bound by the amendments (and the quantification of your Best Claim) if a sufficient majority votes in favour of them, whether you vote in favour or not (and if you fail to vote, this will be counted as a vote against). If you are a non-CRA signatory and you do not vote in favour of the Proposal and it becomes effective you will not be bound by it.

If you are not a Customer with an LBI Asset Claim you do not need to take any action.

Further information on the Proposal (including the relevant detailed legal documentation and guidance notes) is available on the PwC/Lehman's website: http://www.pwc.co.uk/business-recovery/administrations/lehman/lehmans-stakeholder-client-assets.jhtml.

If you wish to contact LBIE with questions concerning the Proposal you should send an email to: generalqueries@lbia-eu.com.

FREQUENTLY ASKED QUESTIONS

Can I vote in favour of the Proposal but dispute my Best Claim valuation?

Once the Proposal is approved by Customers with an LBI Asset Claim you will be deemed to have accepted your Best Claim valuation, unless you have taken steps to dispute this. We therefore urge clients who do not agree with their Best Claim valuations to put this on record with LBIE's administrators as soon as possible and before the 26 March 2013 – it is understood that this objection must be made through the LBIE creditors' portal. This is the case even if you do not intend to vote on the Proposal. LBIE's administrators have made it clear that the Best Claim value cannot be disputed once the Proposal is approved.

What if I do not agree to the value assigned to me for voting purposes?

It is important to note that the voting value set out in the voting value certificate is not binding in any way regarding the value of your non-LBI trust asset claim or unsecured positions. These will be determined separately and in due course. However, some clients are having difficulty in reconciling their voting value and understandably would like more visibility regarding how this has been calculated. We suggest that, if you fall into this category, you approach your LBIE case manager.

What happens if the Proposal is not approved?

If the Proposal is not approved there may be an increased risk that the U.S. Bankruptcy Court and/or the English court would not approve the Settlement Agreement (although, in particular in relation to the U.S. Bankruptcy Court, our view is that LBIE's administrators are overstating this risk). If this is the case then the process of LBIE's recovery of assets from LBI would need to start again with the possibility of litigation being revived in the U.S. If the Proposal is not approved, but the Settlement Agreement becomes effective, LBIE would receive the LBI Distribution but there would be no certainty on the methodology that LBIE would use to distribute the LBI Distribution to Customers with an LBI Asset Claim. In these circumstances, LBIE's administrators would need to seek the guidance of the English court. In essence if the Proposal is not approved then there will be further delays in recovery by Customers with an LBI Asset Claim.

Is English and U.S. court approval to the settlement agreement a formality?

While we would strongly expect both courts to approve the Settlement Agreement such approval is not strictly a formality.

If the Proposal becomes effective will I need to file documents with the U.S. court to remove any duplicate claim I may have filed against LBI?

No, the Proposal will release such duplicate claims against LBI and the approval of the Settlement Agreement by the U.S. court will expunge such claims from LBI's liquidation proceedings. It is important to note that this only affects claims filed against LBI by LBIE's customers arising from trading, financing, custody, clearing, settlement and/or other similar activities conducted by the claimant with or through LBIE, rather than with or through LBI directly.

What level of distributions are LBIE currently anticipating?

The statements sent to customers give an anticipated range of recovery outcomes but LBIE's administrators have expressed the opinion that there is a high probability that gross recovery will exceed 90% of the Best Claim value. However, ultimately recoveries will depend on, among other issues, the value realised upon the liquidation of the LBI Distribution (which will be subject to currency fluctuations) and the aggregate value of Best Claims.

Is it possible that I could get more than 100% of my Best Claim value?

The answer is yes. This will clearly depend on the value realised upon the liquidation of the LBI Distribution, the amount of reserves and the level of Best Claims. However, the amount of the realisations from the LBI Distributions are held on trust solely for Customers with an LBI Asset Claim and, if the amount of such realisations is in excess of the aggregate amount of Best Claims, it is possible that a customer could receive more than 100% of its Best Claim value.

If the Proposal becomes effective when will the first distribution of the fund be made?

LBIE's administrators currently expect a first distribution to be made in the third quarter of 2013.

I am a non-CRA signatory; what is the likelihood of LBIE rejecting my offer?

While we have little guidance on this issue we are of the view that it will be highly unlikely that LBIE will reject such an offer if the relevant voting thresholds to approve the Proposal overall have been met. However, LBIE have indicated that if you seek to dispute your Best Claim value this may be a reason to refuse your offer.

What are the pros and cons of the Proposal?

For Customers with an LBI Asset Claim, the Settlement Agreement and the Proposal do resolve a long standing issue which had been preventing recovery from LBIE and would provide a speedier distribution than would otherwise be the case. The Proposal also creates a greater element of certainty as to the recovery process and legal entitlements. Further, the inclusion of unsecured shortfall provisions provides an element of protection against the risk that an individual customer's distributions are less than the value of its LBI Asset Claim on 19 September 2008. It should also be borne in mind that, if the Proposal is not accepted and does not become effective, then the cost of resolving the recovery of assets from LBI and the on-distribution to Customers with an LBI Asset Claim will involve more litigation, cost and potential delay.

Another positive is that, for Customers with an LBI Asset Claim that are also debtors of LBIE, their share of the LBI Distribution and any shortfall claim will be available to discharge their liabilities to LBIE.

However, it is possible that an individual customer may be able to obtain a better outcome through a non-consensual process (particularly if that process results in the customer receiving its specific securities rather than a pro-rata share in a liquidated fund). It is also possible that the liquidation of such securities and the receipt of a cash distribution may represent a disposal of the securities for tax (in particular U.S. withholding tax) or other purposes which could result in potentially significant additional costs. Advice on tax implications will need to be taken on the facts of each case. However, if the Proposal is not accepted and another methodology is used to resolve the return of LBI Assets, it remains highly unlikely that individual securities will be returned to Customers with an LBI Asset Claim and so tax would likely remain an issue in any alternative solution LBIE's administrators proposed.

Will the Proposal relax the current conditions for transferring client asset claims?

No, the current transfer conditions will apply. CRA signatories will only be able to transfer their entire position under the CRA to another CRA signatory. For non-CRA-signatories who sign up to the Proposal they will only be able to transfer their entire LBI Asset Claim to another non-CRA signatory who has signed up to the Proposal with the consent of LBIE.

FURTHER INFORMATION

If you would like specific advice on the Proposal please contact your usual partner or any of the individuals listed at the end of this bulletin.