Understanding the Challenges Faced by Dissenting Bondholders: A Case Study and Analysis of Remedies
The bondholders’ meeting is a crucial mechanism designed to protect the interests of bondholders, but in practice, it often falls short of achieving this goal. A recent case involving a bondholder named Zhang sheds light on the challenges faced by dissenting bondholders in such meetings.
Zhang, a bondholder of a corporate bond, found himself in a predicament when the issuer violated procedural requirements outlined in the bond prospectus by convening a meeting prior to the bond’s maturity. During the meeting, resolutions were passed to extend the bond’s maturity and waive the procedural violations, despite Zhang’s consistent opposition. This process was repeated multiple times until the issuer eventually entered bankruptcy, leaving the bond unpaid.
This case underscores the power imbalance that exists in bondholders’ meetings, where issuers can manipulate resolutions to their advantage, disregarding the dissent of minority bondholders like Zhang. In China’s legal framework, dissenting bondholders face significant challenges in preventing the implementation of such resolutions, as valid meeting resolutions are binding on all creditors.
To address these shortcomings, looking at international experiences, such as those in Germany and Japan, can provide valuable insights. For example, Japan’s Companies Act requires judicial approval for resolutions passed at bondholders’ meetings, ensuring rigorous review of both procedural and substantive aspects of resolutions. In Germany, a defective resolution annulment system allows dissenting bondholders to challenge resolutions post-event, providing a remedy for unfair or invalid resolutions.
Moving forward, it is essential to strengthen remedies for dissenting bondholders against defective resolutions and ensure their rights are protected. Learning from the experiences of other jurisdictions, China can enhance its bondholders’ meeting mechanism to better safeguard the interests of all bondholders, especially minority dissenting voices like Zhang.
