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Legal glossary

Supplemental indentures with consent of securityholders: Overview, definition, and example

A supplemental indenture with the consent of securityholders is a legal document that modifies, amends, or adds to the terms of an existing indenture (a formal contract between a bond issuer and bondholders) or agreement, with the approval or consent of the securityholders (the bondholders or noteholders). Indentures typically govern the terms of bonds, debentures, or other debt instruments, and a supplemental indenture can be used to change specific provisions of the original indenture, such as interest rates, repayment schedules, or covenants.

For a supplemental indenture to be valid, the bondholders or securityholders must approve the changes, usually through a vote or written consent. This ensures that the modifications are agreed upon by those with a financial interest in the debt instruments.

Supplemental indentures with the consent of securityholders are important because they provide a mechanism for modifying the terms of a bond or debt agreement in a way that is mutually acceptable to both the issuer and the securityholders. These amendments may be necessary due to changes in the financial situation, market conditions, or other factors that require adjustments to the terms of the debt.

For businesses, supplemental indentures allow for flexibility in managing debt obligations, especially when circumstances change. For securityholders, providing consent ensures that they have a say in the changes to the terms of the investment and can assess how those changes might affect their interests, such as the return on investment or the risk of default.

Imagine a company that issued bonds with a 5% interest rate and a 10-year term. After five years, the company is experiencing financial difficulties and seeks to reduce its interest payments. The company proposes a modification to the indenture, lowering the interest rate to 3% for the remaining term. To make this change, the company needs the consent of the bondholders. A supplemental indenture is created that outlines the proposed changes, and the bondholders are asked to approve the amendment. If enough bondholders consent, the supplemental indenture becomes legally binding, and the terms of the bond agreement are modified accordingly.

In another example, a corporation may seek to amend the indenture to allow for a restructuring or early redemption of its bonds. The company would present the proposed changes to the securityholders, and with their consent, a supplemental indenture would be executed to formalize the new terms.

Here’s how a supplemental indenture with the consent of securityholders clause might appear in an indenture agreement:

"The Issuer may, with the consent of holders of at least [specified percentage] of the outstanding securities, execute a supplemental indenture to amend, modify, or supplement any provisions of this Indenture. The amendments shall become effective upon execution of the supplemental indenture and receipt of such consent, which shall be documented through written consent or a vote conducted in accordance with the procedures outlined in Section [X] of this Indenture."

Conclusion

Supplemental indentures with the consent of securityholders provide flexibility for issuers to modify the terms of existing debt agreements in response to changing conditions, while ensuring that the interests of securityholders are considered. By requiring the approval of bondholders or other securityholders, these amendments maintain fairness and protect the rights of investors.

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.

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