What You Need to Know About Consent Solicitation Process
A consent solicitation is a process where a security issuer proposes changes to a security agreement. These changes require the agreement of investors who hold a stake in the security. Consent solicitations can also be used by a company's board to seek shareholder approval for corporate changes outside of the annual meeting. However, many U.S. companies have restrictions on or prohibitions against consent solicitations in their Articles of Incorporation. All consent solicitations must be filed with the Securities and Exchange Commission (SEC).
Basics
A consent solicitation is a formal process where a security issuer seeks approval from investors to make changes to the essential terms of a security agreement. This mutual consent is typically required for significant modifications that affect the stakeholders. Consent solicitations are filed with the U.S. SEC and are subject to regulations at both the federal and state levels, with states often playing a prominent role.
Additionally, consent solicitations can also involve corporate boards seeking written consent from shareholders for proposed changes outside of a regular shareholder meeting. These changes may relate to various aspects of the company's operations or structure. The purpose is to obtain shareholder approval through written consent, allowing the board to proceed with the intended modifications.
How Does Consent Solicitation Work?
In addition to the annual shareholder meeting, corporations may need to make important decisions at other times. To do this, they utilize a process called consent solicitation. Through consent solicitation, corporations propose changes to their shareholders and seek their agreement. This process can be applied to various corporate actions.
During a consent solicitation, the corporation specifies a deadline for shareholders to respond to the proposed change. If the required number or percentage of shareholders agree to the change, it can be implemented. However, if the necessary consent is not obtained, the proposed changes cannot move forward.
The Role of Activist Investors
In addition to annual shareholder meetings, there are occasions when activist investors privately make significant changes in a company. They do this by sending written consent solicitations to other shareholders, informing them of their decision to make the change. These changes often involve company directors or executives but can vary in nature.
While most U.S. companies prohibit consent solicitations, some still allow them. Around 70% of S&P 500 companies restricted or disallowed consent solicitations. The reason behind this prohibition is to prevent activist shareholders from taking control of the company, serving as a defense against hostile takeovers.
In the regulation of consent solicitations, both the SEC and states are involved, but states have more authority. States determine how a company's shareholders can seek written consent, while the SEC oversees and regulates the solicitation process.
Consent Solicitation in the Bond Market
In the bond market, consent solicitation is a common practice. It occurs when the original terms of an indenture are no longer favorable for both the issuer and bondholders, potentially affecting the viability of the bond issue. To address this, the issuer can initiate a consent solicitation statement, reaching out to bondholders and requesting their agreement to proposed changes. Bondholders who consent may receive a consent payment.
Let's consider a corporation that has issued bonds to investors. If the corporation believes that modifying the interest rate or maturity of the bonds would benefit all stakeholders based on the latest economic forecasts, it would issue a consent solicitation to all bondholders. The purpose is to seek permission to implement these advantageous changes.
Conclusion
The consent solicitation is a formal process allowing corporations to make important decisions outside of the annual shareholder meeting. It involves seeking approval from investors to modify a security agreement and is subject to regulations at both the federal and state levels. While most U.S. companies prohibit consent solicitations, some still allow them. Overall, it ensures transparency and accountability, allowing stakeholders to play an active role in decision-making.