Bondholder Votes and Bond Restructuring Under the SchVG

How bondholder votes work under the SchVG

Bondholder votes allow the holders of a German-law bond to change its terms by majority, binding every holder of that bond. The legal basis is the Bond Act (Schuldverschreibungsgesetz, SchVG) of 2009, which applies to identical bonds issued under German law as part of an overall issue (§ 1(1) SchVG).

Without a majority mechanism, a bond's terms can be changed during its life only by an identical contract with every single holder (§ 4 SchVG), which is impracticable for widely held notes. Majority decisions are available only if the terms and conditions of the bond provide for them (§ 5(1) SchVG), so the opt-in at issuance determines the restructuring toolkit years later.

The SchVG does not apply to covered bonds under the Pfandbrief Act or to bonds issued or guaranteed by the Federal Government, a federal state or a municipality (§ 1(2) SchVG). Bonds issued before 5 August 2009 remain subject to the old 1899 Bond Act, but their holders may, with the issuer's consent, resolve by qualified majority to opt into the new regime (§ 24 SchVG). For corporate issuers, including Mittelstand issuers in the German retail bond segment, the SchVG has become the main out-of-court tool for amending bonds in distress.

What a majority can decide

Section 5(3) SchVG lists measures that holders may approve by majority, without being exhaustive. They include changes to the maturity, reduction or exclusion of interest, changes to the due date of principal, reduction of principal, subordination in the issuer's insolvency, conversion or exchange of the bonds into shares, other securities or other payment promises, exchange and release of collateral, change of currency, waiver or restriction of holders' termination rights, substitution of the debtor and changes to ancillary provisions. The terms may limit majority decisions to specific measures or exclude specific measures.

Two limits are absolute. A majority cannot impose an obligation to make a payment on holders (§ 5(1) sentence 3 SchVG). And a resolution that does not provide the same conditions for all holders is invalid unless the disadvantaged holders expressly consent (§ 5(2) SchVG). The issuer must also treat holders equally when amending terms (§ 4 sentence 2 SchVG). In practice, these rules shape restructuring offers: consent fees and different treatment for participating and non-participating holders need careful structuring.

Bondholder votes in meetings and votes without a meeting

Holders resolve either in a bondholders' meeting or by a vote without a meeting, and the terms may provide for only one of these (§ 5(6) SchVG). The issuer or the joint representative convenes the meeting; holders representing five per cent of the outstanding bonds can demand that it be convened, for example to appoint or remove a joint representative (§ 9(1) SchVG). If the demand is ignored, the local court at the issuer's seat, or for issuers without a German seat the Frankfurt local court, can authorise the holders to convene it themselves (§ 9(2), (3) SchVG). The issuer bears the costs (§ 9(4) SchVG).

Each holder votes according to the nominal amount of its bonds. Voting rights are suspended for bonds held by the issuer or an affiliated company or held for their account, and the issuer may not pass such bonds to a third party to vote them in its place (§ 6(1) SchVG).

Vote buying is prohibited: nobody may offer, promise or grant an advantage for voting in a particular way, and holders may not demand or accept one. Issuers that want to reward early support should therefore offer any consent fee openly and on equal terms to every holder who votes, rather than to selected investors, and should explain in the invitation how the fee interacts with the equal treatment rule. Well-prepared bondholder votes also publish a clear term sheet, a liquidity and restructuring opinion where relevant, and questions and answers for retail investors.

The two-step route in practice

Distressed bondholder votes rarely reach the 50 per cent quorum at the first attempt, because retail holders do not register. The usual sequence is therefore a vote without a meeting, which often fails for lack of quorum, followed by a second meeting. The chair of a failed vote without a meeting may convene that second meeting directly, and it then counts as the second meeting for quorum purposes (§ 18(4) SchVG). The reduced quorum of 25 per cent for qualified-majority resolutions applies there (§ 15(3) SchVG). Issuers should build this timeline, typically several weeks including the convening periods, into their liquidity planning.

The joint representative of bondholders

Holders can appoint a joint representative (gemeinsamer Vertreter) to exercise their rights. Any person with legal capacity or an expert legal entity can be appointed. A candidate who is an officer or employee of the issuer or an affiliate, holds at least 20 per cent of the issuer's capital, is a financial creditor holding at least 20 per cent of the outstanding bond, or is under the determining influence of such persons must disclose the relevant circumstances before appointment (§ 7(1) SchVG). The representative has the powers granted by law or by the holders, must follow their instructions and reports to them (§ 7(2) SchVG).

A joint representative may already be appointed in the terms and conditions, but officers and employees of the issuer or its affiliates cannot be appointed that way (§ 8(1) SchVG). The representative may waive holders' rights, in particular to decide on the measures in § 5(3) nos 1 to 9, only on the basis of an individual authorisation by holders' resolution (§ 8(2) SchVG). The terms may cap the representative's liability at ten times the annual remuneration, except for intent or gross negligence (§ 8(3) SchVG).

Bond restructuring in insolvency and under the StaRUG

Once insolvency proceedings over the issuer have been opened in Germany, holders' resolutions are subject to the Insolvency Code (§ 19(1) SchVG). Holders can still appoint a joint representative by majority, and the insolvency court must convene a meeting for that purpose if none exists (§ 19(2) SchVG). In an insolvency plan, all holders must be offered equal rights (§ 19(4) SchVG). The same rules apply where the issuer includes bond claims in a restructuring plan under the Corporate Stabilisation and Restructuring Act (StaRUG) (§ 19(6) SchVG).

The interplay is important for issuers: a SchVG vote binds only the holders of one bond, needs the bond's own majorities and can be blocked by a minority above 25 per cent. A StaRUG or insolvency plan, by contrast, can group bondholders with other creditors in classes and, subject to the cross-class cram-down conditions, bind a dissenting class. Our insights on cross-class cram-down under the StaRUG and insolvency plan proceedings explain those tools. Where a bond is issued by a foreign subsidiary under German law, the SchVG still applies, but the plan route depends on where restructuring proceedings can be opened.

Challenging bondholder votes in court

A resolution can be challenged by action for breach of the statute or the terms and conditions (§ 20(1) SchVG). Information defects support a challenge only if an objectively judging holder would have regarded the information as essential for its vote. Standing is limited to holders who voted and declared their objection in time, provided they acquired the bonds before the meeting was convened or the vote was requested, and to holders who were wrongly excluded or not properly invited (§ 20(2) SchVG).

The action must be brought within one month of the publication of the resolution, against the issuer, before the regional court at the issuer's seat, or the Frankfurt regional court if there is no German seat (§ 20(3) SchVG).

A challenged resolution may not be implemented before a final judgment, unless the competent Higher Regional Court releases it in expedited proceedings modelled on the release procedure for shareholder resolutions in § 246a AktG. The release procedure is crucial for issuers, because a pending action would otherwise block an exchange or haircut for months. Resolutions must be published, for German issuers in the Federal Gazette (§ 17(1) SchVG), and are implemented by amending the global note held by the central securities depository (§ 21(1) SchVG).

Drafting points for issuers and investors

• Opt-in at issuance: without majority provisions in the terms, bondholder votes are not available; investors should check whether the measures in § 5(3) are restricted or excluded.
• Higher majorities: terms may set majorities above 75 per cent for specific measures, which strengthens holdout positions.
• Meeting format: allowing both meetings and votes without a meeting gives flexibility; excluding one can slow down a restructuring.
• Collective termination: if terms require a minimum share of holders to accelerate jointly, the threshold may not exceed 25 per cent, and holders can reverse a termination by simple majority within three months (§ 5(5) SchVG).
• Joint representative: pre-appointing one in the terms, with a defined mandate and liability cap, can speed up a later process.

For the wider context of German bond issuance and listed debt, see our page on capital markets and our insight on Schuldschein loans, which are not securities and fall outside the SchVG.

How TRW & Co helps

We advise issuers, bondholder groups, joint representatives and investors on bondholder votes and bond restructurings under German law. We review terms and conditions, design voting processes and timetables, prepare invitations and resolution proposals, and analyse whether a SchVG vote, a StaRUG plan or an insolvency plan best fits the situation. Where resolutions are challenged, we act in the challenge and release proceedings. For new issues, we draft majority provisions that balance flexibility and investor protection. This page explains the law in general terms and is not advice on a particular bond. To discuss a bond, please contact us.