Capital Markets modernisation
The legal landscape of the Slovak capital markets is being modernised by the recent adoption of an amendment2 to Slovak Act No 530/1990 Coll. on Bonds, as amended (the Act on Bonds), which entered into force on 1 September 2014. The amendment aims to improve and increase financing for businesses by opening up the capital markets more widely, and with less onerous regulation. This article is intended to provide a brief summary of the most important changes.
Slovakia's capital markets at present do not function efficiently and thus fail to reallocate available financial resources. Accordingly, bank financing prevails in Slovakia and international companies operating in Slovakia generally tend to use foreign capital markets. The amended Act on Bonds is part of a series of legislative tools aimed at improving capital flow in Slovakia.
Terms and conditions reduced
The previous Act on Bonds required terms and conditions to contain information already specified on the face of the bonds, which had to be publicised in advance and which could not be later amended (except for the name of the issuer and the information about the place of payment). This was considered to be unduly onerous on issuers, especially new businesses. Some of the information required was largely irrelevant to an investor's decision to invest. The amended Act has less onerous requirements for the contents of prospectuses in terms of the type of information that has to be provided in advance. Terms and conditions can be amended after issue. However, to protect bondholders, any such change is conditional upon a specified level of bondholder consent. Issuers are no longer obliged to publish bond terms and conditions in the national press. Instead, issuers are now expected to disclose terms and conditions to potential investors on a durable medium (eg DVD or USB) and on its website prior to the bond issue and after every amendment of the terms and conditions.
Bondholders' meeting and joint trustee/security trustee
The concept of a bondholders' meeting is a new one. The issuer has the right to convene a meeting at any time. If bondholders, holding at least 10% of the principal nominal value of the issue or a 10% participation in the collective bond, request so in writing, or if the issuer has defaulted on payments arising from the bonds, the issuer is obliged to convene the meeting. The amended Law stipulates the minimum quorum for the adoption of decisions and disclosure of the meeting's decision, and allows the bonds' terms and conditions to regulate further details.
Dissenting bondholders may request an early redemption of the principal nominal value and proportional proceeds from the bonds, or the preservation of the rights and obligations of the issuer and dissenting bondholders under the original terms and conditions of the bonds.
The concept of a joint trustee representing the bondholders is also novel under Slovak law. The trustee's functions are stipulated in the terms and conditions of the bonds, and may also be amended at a bondholders' meeting. Bondholders cannot individually exercise rights that have been delegated to the joint trustee. However, this does not affect their voting rights or the right to replace the joint trustee.
The amended Law expressly recognises the function of a security agent. A joint trustee, who also acts as a security agent, enters into a pledge agreement with the issuer as the pledgee for the benefit of all bondholders.
Subordinated and secured bonds
One of the greatest advantages of the new Law is the introduction and definition of instruments widely used on developed capital markets, including secured and subordinated bonds. These have been used in Slovakia in the past, but have had to be created on a "contractual" basis with no legislative support for these concepts.
As part of the introduction of secured bonds, Slovak law for the first time acknowledges that a pledge can be held by a person different from the owner of the secured receivable (eg a security trustee). Performance of the issuer's obligations can be secured by a pledge for the benefit of the joint trustee as the pledgee. The purpose of the pledge is to secure the bondholders' obligations and to reduce their risk and the security agent enforces this security in its own name and on behalf of the bondholders.
Market supervision is sufficient
The new Law focuses on simplifying the bond issue process and limiting state interference with capital markets. Proof of this purpose is the cancellation of the supervision by the National Bank of Slovakia over issues having private character (meaning issues where the issuer offers the bonds to individually selected investors).
Judicial experience: potential risk area?
The Slovak courts' experience in bonds litigation has been extremely limited to date. There has been only one case relating to bonds since the adoption of the Act on Bonds in 19903 concerned the payment of bond proceeds. Increased capital markets activity may in turn lead to an increase in disputes, particularly as market participants strive to interpret the new legislation. Potential areas for dispute may arise from dissenting shareholders who are not familiar with the concept of being bound by decisions taken by others at bondholder meetings or by a joint trustee. There is limited guidance in the new Act on how dissenting shareholders can challenge such decisions.
The amendment provides an opportunity for Slovak businesses and investors generally, but with a limited risk associated with new legislation which has not yet been tested in the courts.
Footnotes
1. Act No 206/2014 Coll., amending Act No 530/1990 Coll on Bonds, as amended, and amending Act No 429/2002 Coll on the Stock Exchange, as amended (the Amendment).
2. Act No 206/2014 Coll., amending Act No 530/1990 Coll on Bonds, as amended, and amending Act No 429/2002 Coll on the Stock Exchange, as amended (the Amendment).
3. Decision of the Supreme Court of the Slovak Republic, case No 1Obdo V 47/2004.
4. Amendment1 to Slovak Act No 530/1990 Coll. on Bonds, as amended
