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The bondholders¡¯ meeting serves as a key mechanism to safeguard the interests of bondholders. Its establishment is rooted in the characteristics of bonds, such as their widely dispersed ownership, strong liquidity and large number of holders. The meeting aims to represent the collective interests of all bondholders and achieve a unified will through a collective decision-making process.

However, in practice, this mechanism has often failed to effectively protect the legitimate rights and interests of bondholders. This is primarily due to an overemphasis on autonomy of will and the disadvantaged position of minority bondholders. In some cases, issuers have indirectly controlled meetings through major bondholders. This article examines the remedies available to dissenting bondholders in such meetings, drawing on judicial cases and relevant foreign regulations.

Relevant case

Zhang, a bondholder of a corporate bond issued by a company, was entitled to annual interest payments and principal repayment on maturity, as stipulated in the bond prospectus. However, prior to the bond¡¯s maturity, the issuer convened a bondholders¡¯ meeting in violation of the procedural requirements outlined in the prospectus.

During the meeting, resolutions were passed to extend the bond¡¯s maturity by one year and to waive the procedural violations. The issuer subsequently repeated this process multiple times to further extend the bond¡¯s maturity until it eventually entered bankruptcy proceedings. Despite Zhang¡¯s consistent opposition to the extensions, his dissent had no impact on the outcome. Even after the issuer entered bankruptcy, the bond remained unpaid.

This case highlights how bond issuers, by securing sufficient votes of approval, can repeatedly pass resolutions to extend bond maturities and waive procedural violations, effectively controlling the timing of bond repayments. Under China¡¯s current legal framework, dissenting bondholders face significant challenges in preventing the implementation of such resolutions, as valid meeting resolutions are binding on all creditors. The case underscores the shortcomings of China¡¯s bondholders¡¯ meeting mechanism in adequately protecting the interests of dissenting bondholders.

Relevant foreign regulations

When exploring ways to improve China¡¯s bondholders¡¯ meeting mechanism, drawing on international experience is particularly valuable. Compared to common law jurisdictions, the legal frameworks of Germany and Japan, as civil law jurisdictions, align more closely with China¡¯s legal traditions. Examining the relevant provisions in Germany and Japan can provide insights into enhancing China¡¯s bondholders¡¯ meeting mechanism and protecting the interests of minority bondholders.

Japan. Article 734 of Japan¡¯s Companies Act stipulates that resolutions passed at bondholders¡¯ meetings are not effective unless approved by a judicial authority. Such resolutions must comply with the procedures outlined in article 732 of the Companies Act, which requires the meeting convener to apply to the court for confirmation of the resolution¡¯s validity within one week. In other words, the effectiveness of bondholders¡¯ meeting resolutions depends on prior judicial review.

Article 733 further specifies four circumstances under which the court may refuse to approve a resolution: procedurally, if the meeting was convened, or the resolution passed in violation of agreed procedures, or through improper methods, and substantively, if the resolution¡¯s content is unfair or contrary to the general interests of bondholders.

This demonstrates that while Japan does not have a dedicated dissent remedy system, it has achieved a balance between ensuring the validity of resolutions and protecting the interests of bondholders by having judicial authorities conduct rigorous preemptive reviews of both the procedural and substantive aspects of bondholders¡¯ meeting resolutions. The law explicitly outlines circumstances under which resolutions may be denied approval, effectively preventing their misuse by dominant bondholders or issuers.

Germany. The German Bond Act emphasises the principle of bondholders¡¯ autonomy while also recognising the collective nature of bondholder governance and its regulatory principles. This approach extends to the bond law framework, with a notable feature being the introduction of a defective resolution annulment system, which provides dissenting bondholders with post-event remedies.

Under Germany¡¯s defective resolution annulment system, two categories of bondholders are entitled to file for annulment: (1) those who participated in the vote and opposed the resolution; and (2) those who did not participate due to being ¡°illegally obstructed¡± from voting. Once eligible bondholders initiate an annulment lawsuit, the contested resolution does not become automatically invalid, but cannot be enforced until the court¡¯s ruling takes effect. If the court upholds the annulment, the judgment applies to all bondholders of the relevant bond, not just those involved in the litigation.

Remedies for dissenting bondholders

Bondholder meeting defects. The recognition of defects in bondholder meeting resolutions on a case-by-case basis is crucial. In bondholder meetings, if certain bondholders have conflicts of interest with the issuer, the issuer may manipulate these bondholders to control the meeting and pass resolutions favourable to itself, such as extending bond maturities or waiving procedural violations. In such scenarios, dissenting bondholders, often small or medium-sized investors, face significant challenges. Without proper recognition of defects in bondholder meeting resolutions, these dissenting bondholders risk losing all avenues for remedy.

To address this issue, the principles of article 733 of Japan¡¯s Companies Act can serve as a reference to protect investors¡¯ interests. Rational investors would not willingly forego procedural rights, investment interests or other general rights. If a resolution¡¯s content violates the general interests of investors, its legitimacy must undergo strict scrutiny to prevent the issuer from indirectly controlling votes in its favour.

Strengthening remedies. Improving remedies for dissenting bondholders against defective resolutions is essential. Germany¡¯s post-event remedy model effectively balances the need to protect the interests of small and medium-sized dissenting bondholders with the limitations of judicial resources. China could learn from Germany¡¯s experience by moderately allowing dissenting bondholders to annul resolutions that violate general investor interests through litigation. Institutional safeguards are necessary to ensure the protection of dissenting bondholders¡¯ rights.

Ma Jia is a senior partner and Zhang Yanjie is an associate at DOCVIT Law Firm