Control by holders: Overview, definition and example
What is control by holders?
Control by holders refers to a provision in financial or legal agreements, typically involving bonds, debentures, or other debt instruments, that grants certain decision-making powers to a majority (or specified percentage) of the holders of the securities. These powers may include the ability to direct actions related to defaults, amendments, or enforcement of rights under the agreement.
For example, a bond indenture might allow holders of at least 51% of the outstanding bonds to instruct the trustee to take legal action in the event of a default by the issuer.
Why is control by holders important?
Control by holders is important because it ensures that the collective interests of the majority of security holders are considered in critical decisions, such as responding to defaults or modifying terms of the agreement. It provides a mechanism for effective governance, balancing the rights of individual holders with the need for collective decision-making.
For issuers, this provision simplifies negotiations by requiring consensus only from a specified majority, rather than all holders. For investors, it ensures their collective rights are protected and offers a structured process for addressing significant issues.
Understanding control by holders through an example
Imagine a company issues bonds under an indenture agreement. If the company defaults on its interest payments, the indenture allows holders of at least 66% of the outstanding bonds to direct the trustee to declare the bonds immediately due and payable. This ensures that decisive action can be taken without requiring unanimous agreement from all bondholders.
In another example, a loan agreement includes a control by holders provision allowing lenders holding at least 75% of the loan amount to agree on amendments to repayment terms. This enables efficient decision-making while ensuring that the majority of lenders support any changes.
An example of a control by holders clause
Here’s how a control by holders clause might appear in an agreement:
“The Holders of not less than [percentage] of the outstanding Principal Amount of the Securities shall have the right to direct the Trustee to take or refrain from taking any action under this Agreement, including the enforcement of remedies in the event of a default. Any such direction shall be binding on all Holders, provided it is consistent with the terms of this Agreement.”
Conclusion
Control by holders provisions enable efficient governance and decision-making in agreements involving multiple parties, such as bondholders or lenders. They ensure that the collective interests of the majority are respected, while providing a clear process for addressing defaults, amendments, or other critical matters. For issuers, this provision simplifies administration, while for holders, it ensures their rights are protected through collective action. Clearly defining control by holders in agreements promotes transparency, fairness, and efficiency.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.