1) Introduction
On Friday 21 February 2013, the Belgian Official Gazette published a Royal Decree introducing mandatory Collective Action Clauses for issues of Belgian “bons d’Etat/Staatsbons” (hereafter referred to as Belgian Sovereign Notes). The Royal Decree of 17 February 2013 amending the Royal Decree of 9 July 2000 regarding the issue of Sovereign Notes (“Arrêté royal modifiant l’arrêté royal du 9 juillet 2000 relatif à l’émission des bons d’Etat”/ “Koninklijk besluit tot wijziging van het koninklijk besluit van 9 juli 2000 betreffende de uitgifte van Staatsbons” or the Royal Decree) partly1 implements the Collective Action Clause requirement as imposed by Article 12, Paragraph 3 of the recently modified Treaty Establishing the European Stability Mechanism (ESM Treaty).2
Collective Action Clauses (“clauses collective d’action”/“collectieve-actie clausules” or CACs) essentially incorporate into the terms and conditions of (sovereign) bonds a binding mechanism to facilitate amendments to the terms and conditions of a particular bond issue during its term. CACs’ thus introduce for sovereign bonds a similar mechanism as is typically incorporated in private sector bond issues to allow an issuer to achieve after the date of issue amendments of the terms by obtaining the consent of a majority of the bondholders in a way that is legally binding upon all bondholders of the same issue.3
For private sector bonds such variation mechanism is based on express provisions on bondholder meetings contained in the Belgian Companies Code (articles 568 - 580) combined with tailor made contractual provisions set out in the issue documentation.
For Belgian Sovereign Notes, the Royal Decree now provides for the mandatory inclusion by operation of such decree of standard CACs into the terms and conditions of such bonds. The CACs’ content, is described in detail in the Annex to the Royal Decree refers (“Annexe à l’arrêté royal modifiant l’arrêté royal du 9 juillet 2000 relatif à l’émission des bons d’Etat”/ “Bijlage bij het koninklijk besluit tot wijziging van het koninklijk besluit van 9 juli 2000 betreffende de uitgifte van Staatsbons” or Royal Decree Annex).
This Finance e-bulletin briefly outlines the CACs’ scope of application and their quorum and approval thresholds. Procedural rules with regard to bondholders meeting and its possible adjournment are not dealt with.
2) Scope of application
2.1 Limited to Belgian Sovereign Notes
Belgian Sovereign Notes may only be acquired by retail investors (“particuliers”/“particulieren”) as defined in Article 3 of the Royal Decree of 9 July 2000 regarding the issuance of Belgian Sovereign Notes (the Royal Decree of July 2000).
2.2 No specification as to relevant maturity
The ESM Treaty only requires the inclusion of CACs for government securities with maturity above one year. The Royal Decree does not stipulate any minimum duration, but in practice Belgian Sovereign Notes typically mature after three, five or eight years.
2.3 Sovereign Notes’ issued as from 1 January 2013
The Royal Decree provides for the inclusion of CACs, as of 1 January 2013, in all issues of Belgian Sovereign Notes.4 The practical consequences of the Royal Decree’s retroactive application (prompted by the European standardisation5) are limited. Belgian Sovereign Notes are in principle issued only in March, June, September and December.6 Note that the Royal Decree applies to the on-going March 4 issue of Sovereign notes.
3) Quorum and approval thresholds
The Belgian State can convoke a meeting of bondholders at will.7 It should however convoke a meeting of bondholders in case of persisting default8 (“défaut persistante”/“wanprestatie welke voortduurt”) when at least 10% by principle amount of bondholders in writing requires a meeting of bondholders to be held.9
To determine which quorum and approval thresholds suffice to legally bind all bondholders by a modification of the Sovereign notes’ terms10; one has to take into account the criteria discussed below.
- The Quorum and Approval thresholds of the CACs first vary depending on the nature of the modification. The Royal Decree Annex introduces two distinct types of modification:
- Reserved Matter Modifications; and
- Non Reserved Matter Modifications.
- Different quorums and approval thresholds apply for both categories. Within each category, single (“modifications qui concerne une seule ligne”/“wijzigingen die betrekking hebben op een enkele lijn”) vs. cross-series modifications (“modifications qui concerne plusieurs lignes”/“wijzigingen die betrekking hebben op verscheidene lijnen”) should further be distinguished.11
- The Quorum and Approval thresholds could finally defer depending on whether the modification is agreed by a meeting of bondholders or a written procedure (“résolution écrite”/ “geschreven resolutie”).
Note that the correction of manifest errors (“erreur manifeste”/“duidelijke vergissingen”) and/or technical amendments (“modifications techniques” / “technische wijzigingen”) does not require the bondholders’ approval.12
A calculation agent (“agent de calcul”/“berekeningsagent”) shall be designated by the sovereign issuer to determine whether the quorum and approval thresholds are in place for a valid modification.13 On this matter and for further procedural rules with regard to bondholders meeting and its possible adjournment), we refer to the Royal Decree Annex.
3.1 Reserved Matter Modification
Modifications with regard to a “Reserved Matter” (“Matière reservée” / “Voorbehouden kwestie”) (RMM) require compliance with strict quorum and approval thresholds. Reserved Matters indeed involve the amendment of one of the Belgian Sovereign Notes’ essential terms and conditions. These include, but are not limited to14:
i) a change of the date on which any amount is payable under the note ;
ii) a reduction of any amount payable under the note;
iii) the modification of the calculation of any amount payable under the note;
iv) the modification of the currency or place for payment of any amount payable under the note;
v) the introduction of an additional condition for payments under the note or which in any other way modifies the payment obligations of the issuer; and
vi) modifications with regard to the ranking or seniority of the note;
vii) the amendment of the definition of RMM.
In order to reach a quorum (“quorum”/ “quorum”), a RMM requires at least two thirds (66, 66 %) by principal amount of the bond holders to be present.15 Important is that aforementioned quorum also applies to an adjourned meeting.16
A distinct approval threshold (“majorité exigée”/ “vereiste meerderheid”) for a RMM applies with regard to a single and cross series modification of bonds:
a) A RMM for single series of bonds requires approval of the Belgian State and of 75% by principle amount of all bonds represented at a quorate meeting.17 A written procedure RMM requires approval of the Belgian State and of 66, 66 % by principle amount of bondholders.18
b) In addition to approval of the Belgian State and of 75% by principle amount of all bonds represented at a quorate meeting, a RMM across series of bonds requires 66, 66 % by principle amount of bondholders of each individual series represented at a quorate meeting.19 A written procedure RMM across series of bonds requires approval of the Belgian State and of 66, 66 % by principle amount of bondholders plus 50 % of the principle amount of all outstanding bonds of each series.20
3.2 Non Reserved Matter Modification (NRMM)
Modifications with regard to a “Non Reserved Matter” (“Matière non-reservée” /“Niet voorbehouden kwestie”) (NRMM) require a less stringent quorum and approval threshold. Neither the Royal Decree nor the Royal Decree Annex defines what constitutes a “Non Reserved Matter”. One could however safely assume that every modification which does not imply a RMM is to be qualified as a NRMM.
In order to reach a quorum, a NRMM requires at least one in two by principal amount of the bond holders to be present at the meeting.21 An adjourned meeting is quorate if 25% by principal amount is present.22
A quorate meeting could approve the NRMM by at least 50 % by principal amount of all bonds represented at the meeting.23
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Footnotes
1. Note that the Royal Decree’s scope of application (essentially the fact that its scope is confined to Sovereign notes) does not correspond with the ESM Treaty that provides for CACs for all “new euro government area securities”. In the absence of a further Royal Decree, CACs will need to be included on a case to case base in the bond documentation for issues outside the Royal Decree’s scope of application in order to comply with the ESM Treaty.
2. Treaty Establishing the European Stability Mechanism between the Kingdom of Belgium, the Federal Republic of Germany, the Republic of Estonia, Ireland, the Hellenic Republic, the Kingdom of Spain, the French Republic, the Italian Republic, the Republic of Cyprus, the Grand Duchy of Luxembourg, Malta, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Slovenia, the Slovak Republic and the Republic of Finland, OJ L 91, 6.4.2011, p. 1.
3. See Article 4.12 Royal Decree Annex.
4. Note that the CAC requirement applies irrespective the emission’s governing law.
5. Cf. Official memorandum (“Rapport au Roi”/ “Verslag aan de Koning”) on article 2 of the Royal Decree.
6. See in this regard article 4 Royal Decree of July 2000.
7. See Article 4.2 (a) Royal Decree Annex.
8. For what constitutes a default: see Article 1 (j) Royal Decree Annex.
9. See Article 4.2 (b) Royal Decree Annex.
10. On what constitutes a ‘modification’: see Article 1 (e) Royal Decree Annex.
11. On the notions “ligne”/“lijn” and “modifications portant sur plusieurs lignes”/“wijzigingen over lijnen”: see Article 1 (c) and (f) Royal Decree Annex.
12. See Article 6 Royal Decree Annex.
13. See Article 3 Royal Decree Annex.
14. For an overview, see Article 1 (g) Royal Decree Annex.
15. See Article 4.5 a). Royal Decree Annex.
16. See Article 4.6 a). Royal Decree Annex.
17. See Article 2.1. a) Royal Decree Annex.
18. See Article 2.1. b) Royal Decree Annex.
19. See Article 2.2.a) (i) and b) (i) Royal Decree Annex.
20. See Article 2.2. a) (ii) and b) (ii) Royal Decree Annex.
21. See Article 4.5 b) Royal Decree Annex.
22. See Article 4.6 b) Royal Decree Annex.
23. See 2.5. Royal Decree Annex.
