The Communiqué on Board of Debt Instrument Holders

September 2020 Nezihe Boran
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Introduction

Law No. 7222 regarding Amendments to the Banking Law, as well as Certain Other Laws (“Law No. 7222”) entered into force through its publication in the Official Gazette dated 25.02.2020. Law No. 7222 introduced, among others, Article 31/A (Board of Debt Instrument Holders) to Capital Markets Law No. 6362[1] (“Capital Markets Law”). The Capital Markets Board ("Board") was authorized to determine the procedures and principles regarding the implementation of the Article added to the Capital Markets Law. As such, the Communiqué on Board of Debt Instrument Holders (II-31/A.1) (“Communiqué”) prepared by the Board entered into force through its publication in the Official Gazette dated 11.09.2020. This article will mainly focus on the Board of Debt Instrument Holders (“BDIH”) as well as the meetings of BDIH, decision quorums, breach of payment obligations by the issuer and structuring of debt instruments as regulated under the Communiqué.

Debt Instrument and the Board of Debt Instrument Holders

Debt instruments used as an alternative form of financing are defined under the Communiqué on Debt Instruments (VII-128.8) as the bonds issued by debtors, bonds convertible to shares, exchangeable bonds, financing bills, precious metal bonds and capital market instruments, and are accepted as debt instruments by the Board.

It was necessary to establish BDIH in order to increase reliance on debt instruments, to protect investors in case of default, and to rapidly adapt to changing market conditions.[2] The respective regulations have been made, firstly, through by inserting the Article in the Capital Markets Law and, subsequently, into the Communiqué. The Communiqué allowed investors to act, collectively, according to changing conditions, and issuers and investors to agree to change the terms and conditions of their debt instruments.[3]

According to Article 31/A of the Capital Markets Law, the owners of the debt instruments of the issuer in circulation form the BDIH. Holders of each tenor of debt instrument can create a separate BDIH. BDIH is divided into two, as general and tenor BDIH.

Tenor BDIH is a board formed by the debt instrument owners of one or more than one tenor debt instrument. It acts with an aim to decide on changes that will affect the investment decisions of the investors on conditions and subjects, which are specified in the Communiqué, or in the prospectus / issuance certificate, regarding the debt instruments owned or defined in the Central Registry Agency ("CRA") based on these documents. It convenes at the request of the issuer"s board of directors or the relevant debt instrument owners. General BDIH refers to the BDIH collected in line with the demands of the issuer"s other debt instrument owners in circulation, excluding the schemes participating in the Tenor BDIH decision on the grounds that any decision of Tenor BDIH adversely affects their rights.

According to Article 4 of the Communiqué (Board of Debt Instrument Holders), the Tenor BDIH that is formed by the related debt instrument holders must take a decision in order to make changes in the original terms and conditions of the debt instrument, and which will affect the investment decisions of the investors.

Meetings of BDIH and Decision Quorum

The principles and conditions regarding the invitation and decision making of the BDIH must be determined in the prospectus and / or issuance certificate prepared by the issuer for the issuance of such debt instrument.

Whether it is necessary to make changes in the prospectus or issue a document regarding the debt instrument or the commitments regarding the financial or operational status of the issuer against the debt instrument holders, if necessary, the relevant decision quorums are determined in the prospectus or issued document. For the decisions taken within this framework, the approval of the General BDIH is not required.

Unless a higher quorum is stipulated, the decisions in the Tenor BDIH meetings are taken with the affirmative vote of the debt instrument holders representing two-thirds of the total nominal value of each tenor in circulation. Decisions taken at the BDIH meetings will not be valid unless approved by the issuer"s board of directors within three business days at the latest from the date of the meeting. Tenor BDIH decisions, which are approved by the issuer"s board of directors and not rejected by the General BDIH decision, shall also be in effect for the holders of the same tenor of debt instruments who did not vote in favor of these decisions or did not attend the meeting despite a duly made invitation.

Those who hold 20% of the nominal value of other debt instruments on the grounds that a decision taken in the Tenor BDIH and approved by the board of directors of the issuer, adversely affects their rights, may request the General BDIH to convene within five business days after the approval decision of the board of directors. Following termination of such period, the gathering of the General BDIH cannot be requested and the decisions taken in the Tenor BDIH become final.

The General BDIH convenes within fifteen business days from the date of approval of the relevant Tenor BDIH decision by the issuer"s board of directors. Decisions in the General BDIH meetings are made by the votes of the debt instrument holders representing at least two-thirds of the total nominal value of the debt instruments that entitle them to attend such meeting. General BDIH discusses the decisions taken in the Tenor BDIH and approved by the board of directors of the issuer and that negatively affect their rights. If the decisions discussed are rejected by a two-thirds majority, the Tenor BDIH decision does not come into force. In the event that the General BDIH does not convene within this period despite the duly invitation made by the board of directors, Tenor BDIH decisions become final.

Within the scope of Article 6 of the Communiqué (Principles Regarding Meeting), it is stipulated that the BDIH meetings will be held physically. However, it is further ensured that decisions can be made by circulating and signing the decision by circulation and / or electronically without holding a physical meeting. BDIH can also hold meetings electronically. The list of those who can attend the BDIH meeting is prepared by the board of directors according to the list given by the CRA.

Debt instruments owned by the issuer and / or related parties do not provide its holder with voting rights in the BDIH meetings and are not taken into account in quorums.

Issuer’s Default

The legislator also regulated the case that the investors and the issuer reach an agreement on restructuring in the event of default in the payment of debt instruments. In this context, in order to ensure the applicability of the restructuring, it is aimed to stop the previously initiated legal proceedings, halt the statute of limitations and loss of rights, and the legal procedures will be terminated upon execution of the debt instruments.[4] Parallel regulations with the Capital Markets Law are also included in the Communiqué.

According to Article 9 (Issuer"s Obligation to Pay, Violation of This Obligation and Structuring of Debt Instrument) of the Communiqué, in the prospectus or issue document, among others, the nature and scope of the debts arising from the debt instrument, and the situations that would deemed as default in the repayment of these debts, and the definition and scope of defaults that may occur in repayments, are included in solidified terms.

In the event that the terms and conditions of the debt instruments are changed following occurrence of a default in the repayment of debt instruments, all proceedings initiated due to the default of the debt instrument are suspended as of the date when the terms and conditions of the relevant debt instrument are deemed to have been changed, the injunction and precautionary attachment decisions are not applied, the statute of limitations and loss of rights periods that can be interrupted by a legal proceeding do not process. After all debts arising from the debt instrument are fulfilled, the remaining legal proceedings are terminated.

Other Regulations

Upon fulfillment of the conditions specified in Article 5 of the Communiqué (Determination of the Representative of Debt Instrument Holders), the representative of the debt instrument holders can be elected with the affirmative vote of the debt instrument holders representing more than half of the nominal value of the issuers in circulation. The aforementioned Communiqué regulations will not apply to debt instruments issued by the issuer in abroad.

Conclusion

Legislative arrangements are made for the establishment of BDIH in order to increase reliance in debt instruments, to protect investors in case of default, and to rapidly adapt to changing market conditions. With the Communiqué, the holders of each tenor of debt instrument are given the opportunity to form a separate BDIH. The principles and conditions for the invitation of the BDIH to a meeting and making a decision were obliged to be determined in the prospectus and / or issuance certificate prepared by the issuer for the issuance of the debt instrument. The quorums required for BDIH decisions were determined in the Communiqué. As well, in the Communiqué, in the case of default in the payment of debt instruments with an aim to ensure the applicability of the restructuring, it was also regulated termination of the previously initiated legal proceedings, not processing the statute of limitations and loss of right periods, and the legal proceedings are to be canceled with the execution of the debt instruments.

[1] Capital Market Law No. 6362, OG No. 2851330, 12.2012.

[2] https://www.procompliance.net/borclanma-araci-sahipleri-kurulu-tebligi-ii-31-a-1/ (Access date: 21 September 2020).

[3] https://www.spk.gov.tr/Duyuru/Goster/20200911/0 (Access date: 21 September 2020).

[4] https://www2.tbmm.gov.tr/d27/2/2-2596.pdf (Access date: 21 September 2020).

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