Since the new German Act on Debt Securities was passed in 2009 (SchVG 2009), bond holders can be represented by a joint representative vis à vis the issuers of a bond and take binding decisions that require a simple majority.
Before the act was passed, insolvency proceedings were often the only option in crises if, in financial terms, the bond exposure was the determining factor. Especially in the case of going-concern solutions, all bond holders had, in effect, to be persuaded if a change was to be made that did mean a restriction in the rights attested in the bond terms but, however, appeared to have less of an impact on the value in the long term.
It often wasn’t possible to restructure bond exposures because of the difficulty on the part of the issuers in communicating with investors, a large proportion of whom were anonymous, but also due to a lack of clear organisational regulations as well as the stipulation that bond holder consent had to be unanimous.
Simple majority decisions and joint representative from 2009
Since 2009, it’s been possible to appoint a joint representative. This person can already be specified by the obligor in the bond terms (as a contracted agent) or subsequently by the bond holders (as an elected agent).
The 2009 SchVG gave the joint representative a number of responsibilities and powers that amalgamate and strengthen the rights of the bond holders towards the issuers. In particular, a simple majority applies, i.e. unanimous consent is no longer required for binding decisions on the part of the bond holders. The responsibilities and powers of the joint representative – even regarding responsibilities above and beyond those stated by the legislation – can also be increased and/or restricted based on consent of a simple majority of the creditors.
The joint representative has the following powers:
- The representative can demand that the obligor provides all the information necessary to meet the responsibilities required of the representative (article 7, section 5, SchVG 2009);
- The representative can convene a meeting of creditors (article 9, section 1, SchVG 2009);
- The representative can chair the meeting if the representative has convened it and the court has not appointed a different person as the chair (article 15, section 1, SchVG 2009)
In any insolvency proceedings, the joint representative is alone entitled and obliged to enforce the rights of all creditors in the insolvency proceedings (article 19, section 3, SchVG 2009).
The joint representative must carry out all responsibilities and exercise all powers in the interests of the creditors. The representative must also follow the creditors’ instructions and report on his or her activities in a timely manner (article 7, section 2, SchVG 2009).
Appointing a joint representative pools the creditors’ interests, increases transparency and the ability of the creditors to respond in situations where restructuring is required.
Back in 2010, shortly after the 2009 SchVG was passed, the first international issues emerged with a joint representative appointed in the bond terms.
In 2010, Deloitte was the first joint representative appointed in the bond terms in Germany and has since supervised a whole host of bond issues in this capacity. The issues amount to a double-digit total of billions of euros.
In this role, Deloitte draws on its longstanding expertise as a transaction party in structured bonds (it has been performing trustee services since 1998) and on its restructuring expertise.