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Scottish Court Rules That U.S. Policyholders Challenging Scottish Lion Solvent Scheme Have A Right To Review Documents Relevant To The Vote

April 15, 2011

WASHINGTON, DC, April 15, 2011 — On March 14th, Scotland’s Inner House of the Court of Session (Scotland’s Court of Appeals) ruled in favor of American creditors challenging a “solvent Scheme of Arrangement” that would allow the Scottish Lion Insurance Company Limited, a solvent insurer, to cut off valuable and irreplaceable coverage rights of policyholders. The American policyholders, Goodrich Corporation, Exxon Mobil Corporation, Textron, Inc., ITT Corporation, and Harbinger Group Inc., represented by Covington & Burling LLP, sought production of documents generated by or on behalf of Scottish Lion, and documents provided to Scottish Lion by other creditors whose votes in favor of the scheme were valued far above those of other scheme creditors, to permit the parties and the Court to examine the fairness of the voting process on which approval of the Scheme was based.

The Scottish Inner House affirmed a ruling of the trial judge, Lord Glennie, that documents relating to the valuation by Scottish Lion of the votes cast for and against the scheme must be made available to Scheme Creditors challenging the Scheme to allow them to see whether the valuation was conducted in a fair and even handed manner. The Court affirmed Lord Glennie’s ruling that Creditors voting on the Scheme had waived privilege on documents they submitted to Scottish Lion in a judicial proceeding they knew required approval by the Scottish courts. The Court found review of such documents to be particularly important because: (1) Scottish Lion failed to obtain the necessary statutory majorities based on the value of votes “as cast;” (2) in the IBNR class, Scottish Lion would not have obtained the statutory majorities had it not reduced the value of the votes cast against the Scheme far more than the votes cast in its favor -- votes against the Scheme were reduced on average by 99% while votes in favor were reduced on average by 24%; and (3) the Court noted a potential “blot” on the scheme due to the fact that certain large votes in favor of the Scheme were agreed by Scottish Lion prior to the vote. The Court also noted that Pricewaterhouse Coopers, which played a substantial role in determining the values of the votes cast in the Scheme, stood to receive a contingent fee “calculated by reference to any return to the petitioner’s shareholders.”

Covington & Burling LLP has successfully represented U.S. policyholders opposing solvent schemes in previous proceedings including British Aviation Insurance Company, the Willis Faber Underwriting Management scheme (“WFUM”), as well as in prior proceedings in Scottish Lion, all of which have involved the proposed divestiture of insurance rights of policyholders valued in the hundreds of millions of dollars.

Mr. James McNeill QC, and Ms. Jane Munro appeared for the Opposing Creditors in the Scottish proceedings, instructed by Mr. Gavin Henderson of Simpson & Marwick in Edinburgh. The transatlantic Covington team was led by William Greaney, a Washington-based partner and included DC partners Ben Lenhart and Patricia Barald, and associates Shara Boonshaft and Joshua McKarcher, London partner Roger Enock, and New York of counsel Susan Johnston.

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