By Mark J. Roe, Harvard Law School
The Trust Indenture Act’s ban on restructuring payment terms via a vote has come to the fore in recent litigation. This memo examines broad aspects of the recent controversies to outline a path forward for a sensible legal structure governing out-of-bankruptcy restructurings.
There are four points to be made:
- The recent Southern District of New York decisions striking down exit consent transactions are justified under the Trust Indenture Act.
- The Act impedes out-of-bankruptcy restructurings because it clearly but mistakenly bars votes that restructure bond payment terms. Restructurings outside bankruptcy cannot succeed when widespread consent is needed. But in an institutionalized bond market, there is little reason to bar restructuring by vote.
- The Act’s ban on votes creates the potential for holdouts (or earnest dissenters) to destroy a good deal that most bondholders sincerely want. But to combat the Act’s voting ban (and sometimes to force an unsound restructuring), issuers use exit consent offers, which can impair bondholders’ indenture rights so severely that they reluctantly accept an offer whose terms they dislike. Courts cannot resolve both of these distortions; other lawmakers need to come to the table.
- Legislative solutions are possible. While awaiting wise legislation, there is another way to construct sensible rules for bond workouts — one that has previously not been recognized. The Securities and Exchange Commission has broad authority to exempt indentures and transactions from the full force of the ban on voting.
SEC exemptive rulemaking provides a viable path to facilitate out-of-bankruptcy restructurings of public bond issues going forward. The appellate courts can and should affirm the lower court decisions that the Trust Indenture Act bans exit consent degradation, and the SEC can and should then use its exemptive power to carve out uncoerced votes on payment terms from the Act’s voting ban.
The full memo is available here.