Protection of bond holders’ rights should become clearer

15.01.2015 Protection of bond holders’ rights should become clearer

On 7 January 2015, the Government of the Republic of Lithuania approved of the draft Law on Protection of Interests of Holders of Bonds Issued by Public Limited Liability Companies and Private Limited Liability Companies (the “Law”), as well as of amendments to other legal acts related to this.

If the Seimas of the Republic of Lithuania adopts the Law, protection of rights of corporate bond holders (including corporate convertible bond holders) should become clearer and should meet their interests better.

Mantas Gofmanas, Senior Associate at TGS Baltic, commenting on the draft Law, says that certain provisions in connection with protection of interests of bond holders are currently provided for in Article 55 of the Law on Companies, also in some articles of the Law on Securities. But this protection in fact applies only to those who hold publicly issued bonds. Besides, it is rather fragmentary and does not ensure the necessary scope of proper regulation. For example, paragraph 7 of Article 55 of the Law on Companies says that bond holders that hold 1/2 of a bond issue have the right to make certain decisions, however, the Law on Companies does not establish the procedure of initiation and convocation of bond holders’ meetings, making and announcing relevant decisions, etc.

Besides, the above-indicated legal acts do not give details of rights and duties either of bond holders or of a bond holders’ fiduciary (the “Fiduciary”), nor guarantees securing rights given to them (the right to receive necessary information from the company, the right to involve third parties for ensuring protection of bond holders’ interests efficiently, etc.). The current practice is still such that all these missing elements of regulation (regarding competence of bond holders’ meetings, their convocation and decision making thereat, also regarding ensuring rights of bond holders and their Fiduciaries, etc.) are usually entered into decisions on bond issues and bond subscription agreements.

M. Gofmanas is convinced that the adoption of the Law would fill in the above-mentioned gaps in regulation. Besides, the Law establishes that the mechanism of protection of bond holders’ interests provided for therein will be able to apply not only to holders of publicly issued bonds but also to private issues of bonds issued by private limited liability companies, if the body issuing such bonds decides so.

It is also important that the Law would expand a group of possible Fiduciaries, which would increase competition by itself and would probably reduce the bond issue costs. Currently, it is exclusively an intermediary of public trading in securities, i.e. a financial brokerage firm or a credit institution authorised to provide investment services, that can be a Fiduciary. According to the Law, in addition to the above, attorneys-at-law who practice individually and as members of a partnership, professional law partnerships, as well as entities established in another EU member state, a state of the European Economic Area or exercising rights given to them by EU legal acts to get employment or become self-employed in the EU member states, which have the right to engage in activities analogous to services of a Fiduciary, will also be able to act as Fiduciaries.

The Law, if adopted, also would finally establish the principle of avoiding a Fiduciaries’ conflict of interest, failure to observe which has practically caused many uncertainties. The new regulation would expressly prohibit appointing the arranger of a bond issue of the issuing company, the holding of the issuing company, as well as persons, who control the issuing company, as a Fiduciary.