Consent Solicitation

What is Consent Solicitation?

Consent solicitation is a formal process undertaken by an issuer to seek approval or consent from its stakeholders for proposed amendments or changes to existing agreements or terms.

This process occurs if the issuer seeks permission from bondholders to modify the terms of the bonds, such as interest rates, maturity dates, or other contractual provisions. Typically, a corporation makes important company decisions at its annual shareholder meeting, such as deciding on its board of directors. However, oftentimes decisions need to be made outside of the annual shareholder meeting, and this is when a consent solicitation comes into play.

The goal of consent solicitations is to solicit written consent from stakeholders in a transparent and compliant manner, ensuring that proposed changes are effectively communicated and implemented with the support of the majority of affected stakeholders.

Purpose of Consent Solicitations

In a consent solicitation, the issuer presents a detailed consent solicitation statement outlining the proposed amendments and the rationale behind them. Bondholders or shareholders then have the opportunity to review the proposal and submit their consent or dissent. Once the required majority or threshold of stakeholders has provided their consent, typically through written consent forms, the proposed changes become binding on all relevant stakeholders, even those who did not participate in the voting process.

One key consideration in the consent solicitation process is the aggregate principal amount of outstanding notes or securities affected by the proposed changes. Issuers must obtain consent from holders representing at least a majority of the aggregate principal amount of outstanding notes to implement the proposed amendments successfully. Additionally, jurisdictions regulate consent solicitations to varying degrees, with some imposing specific requirements or restrictions on the solicitation process.

Consent solicitations provide issuers with a mechanism to efficiently navigate changes in market conditions or business circumstances. Whether it's adjusting interest rates on bonds to reflect current market trends or amending corporate bylaws to adapt to evolving regulatory requirements, consent solicitations enable issuers to respond promptly to changing circumstances while upholding their obligations to stakeholders.

Advantages and Disadvantages

Advantages

1. Flexibility. Consent solicitations offer issuers the flexibility to make necessary changes to existing agreements or terms outside of formal shareholder or bondholder meetings. This agility allows issuers to respond promptly to changing market conditions or business circumstances without the delay associated with convening formal meetings.

2. High Efficiency. Conducting a consent solicitation typically incurs lower costs compared to organizing and convening formal shareholder or bondholder meetings. This process could be more beneficial for issuers, especially in situations where making amendments or changes is time-sensitive or when the proposed changes are relatively minor.

3. Enhanced Stakeholder Engagement. Consent solicitations provide an opportunity for issuers to engage directly with their stakeholders and solicit their input and consent regarding proposed changes. This engagement fosters transparency, trust, and goodwill among stakeholders, strengthening the issuer's relationship with its investors.

Disadvantages

1. Limited Participation. Despite efforts to engage stakeholders, not all bondholders or shareholders may participate in the consent solicitation process. This limited participation can result in decisions being made by a subset of stakeholders, potentially excluding the perspectives or interests of those who do not participate.

2. Complexity and Compliance. Consent solicitations involve navigating complex legal and regulatory requirements, including compliance with securities laws and regulations. Ensuring compliance with these requirements can be time-consuming and resource-intensive for issuers, particularly if the proposed changes are subject to scrutiny by regulatory authorities.

3. Potential for Misuse. In some cases, consent solicitations may be used by activist investors or corporate entities to pursue agendas that may not align with the broader interests of stakeholders. This potential for misuse can lead to conflicts or disputes among stakeholders and may undermine the integrity of the consent solicitation process.

Consent Solicitation Process

In the consent solicitation process, stakeholders are often provided with a consent resolution form, which serves as the official document for expressing their agreement or dissent regarding proposed changes. This form outlines the specific amendments or resolutions being sought and typically includes language to ensure clarity and transparency in the consent solicitation process. Additionally, issuers may include such identifying words within the consent solicitation materials to accurately convey the nature and purpose of the proposed changes to stakeholders.

To facilitate the consent solicitation process, issuers may engage the services of a solicitation agent, typically an investment bank or financial institution, to assist in communicating with stakeholders and managing the solicitation process. The solicitation agent acts as an intermediary between the issuer and stakeholders, helping to ensure compliance with regulatory requirements and facilitating the collection of consents.

Legal Framework and Regulation

1. Securities and Exchange Commission (SEC) Regulations. Consent solicitations in the United States are subject to oversight by the Securities and Exchange Commission (SEC). The SEC regulates the solicitation process, requiring issuers to adhere to specific rules and guidelines when seeking consent from stakeholders. This includes the filing of solicitation materials with the SEC and compliance with disclosure requirements to ensure transparency and investor protection.

2. State Corporate Laws. In addition to federal regulations, consent solicitations may also be subject to state corporate laws, particularly those governing corporations' internal affairs. States have the authority to regulate the solicitation of written consent from shareholders, including the procedures and requirements for conducting consent solicitations. Delaware, in particular, is a common jurisdiction for corporate governance matters, and its laws often serve as a model for other states.

3. Corporate Governance Documents. The legal framework for consent solicitations may also be influenced by a company's corporate governance documents, such as its articles of incorporation and bylaws. These documents may contain provisions governing the process for seeking consent from shareholders, including the thresholds for approval and procedural requirements.

4. Disclosure and Transparency Requirements. Consent solicitations typically involve the dissemination of solicitation materials to stakeholders, providing them with information about the proposed amendments and the rationale behind them. Issuers are required to comply with disclosure and transparency requirements, ensuring that stakeholders are adequately informed to make an informed decision regarding their consent.

5. Shareholder Rights and Protections. The legal framework for consent solicitations aims to protect the rights of shareholders and ensure that their interests are considered in the decision-making process. Shareholders have the right to receive clear and accurate information about the proposed amendments and the opportunity to participate in the consent solicitation process.