Collective action with respect to bonds issued under German law
| Pages | 111-117 |
| Date | 01 June 2004 |
| DOI | https://doi.org/10.1108/13581980410810722 |
| Published date | 01 June 2004 |
| Author | Hendrik Haag,Daniel Weiβ |
Papers
Collective action with respect to bonds
issued under German law
Hendrik Haag and Daniel Weiß
Received (in revised form): 19th February, 2004
Hengeler Mueller, Bockenheimer Landstraße 51, D-60325 Frankfurt am Main, Germany;
tel: +49 69 1709 50; fax: +49 69 725 773; e-mail: hendrik.haag@hengeler.com
Dr Hendrik Haag is a partner in the bank-
ing and capital markets group of Hengeler
Mueller’s Frankfurt office. He has more
than 15 years’ experience in advising
issuers and underwriters of capital market
instruments.
Dr Daniel Weiß is an associate in the
banking and capital markets group of Hen-
geler Mueller’s Frankfurt office.
ABSTRACT
KEYWORDS: bondholder meetings, note-
holders’ meetings, collective action
clauses, waivers of bond terms, waivers of
note terms
Bonds governed under German law would nor-
mally not contain collective action clauses, ie
provisions dealing with majority decisions by
bondholders by which certain bond terms may
be altered or waived. This is because it is
uncertain whether, in the absence of a statu-
tory basis, a decision taken by a majority of
bondholders would be binding upon a dissent-
ing minority. For certain circumstances, how-
ever, a statutory basis exists in the form of a
law enacted in 1899 which, during the last
decades, has been very rarely used. This paper
discusses in what cases the law may be
invoked, what decisions can be made by bond-
holders and what procedural requirements must
be observed for getting to a binding and
unchallengeable decision.
INTRODUCTION
In the wake of the most recent South Amer-
ican debt crisis, collective action clauses have
become the subject of public debate. For
sovereign issuers, this topic is particularly
relevant because insolvent states are not able
to seek relief by entering into insolvency
proceedings.
1
Accordingly, unless they
reach an agreement with each holder,
indebtedness under publicly traded instru-
ments cannot be reduced or altered, and if
the issuer is unable to pay it remains in
default.
For private entities the situation is differ-
ent. They can seek protection from their
creditors, including holders of publicly
traded instruments, by seeking relief under
applicable insolvency laws. In insolvency
proceedings, indebtedness under bonds can
be wholly or partially discharged or other-
wise rescheduled. This makes the availabil-
ity of collective action less important. The
institution of insolvency proceedings, how-
ever, may not be desirable if expected
liquidation values are significantly below
going concern values and a debt restructur-
ing outside of insolvency is required to rea-
lise the latter. Sometimes issuers wish to
obtain a decision by bondholders waiving a
Page 111
Journal of Financial Regulation and ComplianceVolume 12Number 2
Journal of Financial Regulation
and Compliance, Vol. 12, No. 2,
2004, pp. 111–117
#Henry Stewart Publications,
1358–1988
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