Joint First True-up Distribution and Catch-up Distribution under the Common Terms – 25 April 2014

Having reached a significant milestone with the Internal Revenue Service (“IRS”), the Joint Administrators will shortly announce a Common Terms Distribution which will be a joint ‘First True-up Distribution’ and a ‘Catch-up Distribution’ (each as defined below).

Although for ease of understanding they are described separately in this announcement, the First True-up Distribution and the Catch-up Distribution will be conducted as a single Common Terms Distribution.

Capitalised terms used in this announcement but not otherwise defined shall have the meaning given to such terms in the Common Terms. 

Update on Agreement with the IRS

On 7 April 2014 Lehman Brothers International (Europe) (in administration) (“LBIE”) executed an agreement with its withholding agent and the IRS regarding the US federal income tax treatment of the first Common Terms Distribution in September 2013 (“LBIE Guidance”).

The LBIE Guidance provides that the methodology to determine the character and source of the settlement payments up to 100% of a Consenting Beneficiary’s Best Claim is by reference to the Consenting Beneficiary’s Best Claim entitlement.  Furthermore, the LBIE Guidance also establishes the total US withholding tax due and the associated withholding on the first Common Terms Distribution in September 2013.   

LBIE will work with the IRS on obtaining guidance in respect of the character and source of settlement payments for the second Common Terms Distribution in January 2014 and will provide an update on progress in due course.

LBIE also has certain relevant obligations under the LBI settlement agreement and is working constructively with LBI to ensure that these continue to be respected.

Proposed First True-up Distribution

(i) What is being distributed?

LBIE has begun the process of requesting a release of excess funds on deposit with the IRS and is preparing to make a distribution (the “First True-up Distribution”) of those funds to the extent that they were designated ‘Attributable Reserves’  in respect of potential U.S. tax liabilities for the purposes of the first Common Terms Distribution.  

(ii) Who will participate in the First True-up Distribution?

The funds released for the First True-up Distribution will only be distributed to those Consenting Beneficiaries who participated in the first Common Terms Distribution ("September Beneficiaries") and for whom Attributable Reserves were made in respect of potential U.S. tax liabilities. 

September Beneficiaries who had a Form W-9 tax status as a US person (or intermediary counterparties where the ultimate beneficial owners were entirely US persons) did not have any Attributable Reserves made in respect of potential U.S. tax liabilities for the first Common Terms Distribution and will not, therefore, receive any distribution as part of the First True-up Distribution.

For the same reason, Consenting Beneficiaries who did not participate in the first Common Terms Distribution in September 2013 will not receive any distribution as part of the First True-up Distribution even if they had Attributable Reserves made in respect of U.S. tax liabilities as part of the second Common Terms Distribution in January 2014.

The Common Terms still require LBIE to send Notices of Distribution to ‘Qualifying Consenting Beneficiaries’ whose circumstances are described in the two preceding paragraphs, but in each case their Notice of Distribution for the First True-up Distribution will show a Gross Distribution of zero.

 Catch-up Distribution

Simultaneously with the First True-up Distribution,  LBIE will also make a catch-up distribution (the “Catch-up Distribution”)  for Consenting Beneficiaries who satisfy the eligibility criteria for this Common Terms Distribution but who did not participate in either or both of the previous Common Terms Distributions (“Catch-Up Beneficiaries”).

Catch-up Beneficiaries will be brought into the same position as if they had participated in all previous Common Terms Distributions (i.e. the sum total of all amounts paid, appropriated or reserved for them will be equivalent to 106% of their Best Claim).

Until LBIE has i) agreed with its withholding agent that the methodology described in the LBIE Guidance can be applied to subsequent Common Terms Distributions and/or ii) received additional IRS guidance specific to that distribution, LBIE will continue to make a 30% withholding reserve on distributions paid or allocable to counterparties or beneficial owners that are not US persons that have provided a Form W-9.

Key Dates

The relevant dates for the proposed Common Terms Distribution are as follows:

Second True-up Distribution

It is hoped that LBIE will be in a position to make a true-up distribution of funds released from deposit with the IRS to those Consenting Beneficiaries who did not participate in the First True-up Distribution (whether because they were not a September Beneficiary or they were a September Beneficiary but did not satisfy the eligibility criteria for participation in the First True-up Distribution) early in Quarter 3 of 2014.