The Voting Prohibition in Bond Workouts

Abstract

The Trust Indenture Act prohibits a binding vote of bondholders to change any core term-principal amount, interest rate, or maturity date-of a bond issue. In this Article, I show how the prohibition on a collective action clause inhibits a troubled company's ability to reorganize outside of bankruptcy. Moreover, the prohibition — a carryover of 1930s thinking — fails to implement satisfactorily the underlying original goals of individualized bondholder choice and bondholder protection. The bar on bond issue majority vote, collective action clauses should be repealed.

Keywords: bankruptcy, restructuring, Trust Indenture Act, collective action clauses, rent-seeking, creditors’ bargain, reorganization, exit consents, creditor coercion

JEL Classification: G18, G30, G34, G38, J52, K11, K12, K22, L21, L62