Debt Instrument Holders’ Board Communiqué

The Capital Markets Board of Turkey (“CMB”) published a new communiqué regulating the debt instrument holders’ board (“DIHB”). This new Communiqué numbered II.31/A.1 (“Communiqué”) came into force with its enactment on 11 September 2020. DIHB was first introduced into the CMB legislation with the amendments made to the Turkish Capital Markets Law (“CML”) in February 2020. You may find below a summary of the Communiqué which supplements the amendments made to the CML earlier this year. 

You can also find more information on the previous amendments mate to the CML in our detailed client note available here.

What is the Debt Instrument Holders’ Board?

The Communiqué defines DIHB as a special assembly convened at the request of the board of directors or debt instrument holders. DIHB convenes in cases stated under the prospectus or the issuance certificate and this Communiqué. The reasoning of the corresponding provision in the CML sets forth that the DIHB is introduced to allow the investors to act collectively against changing market conditions and agree on a common solution with the issuers to alter the terms and conditions of debt instruments accordingly. 

Different Types of Debt Instrument Holders’ Board

There are two types of DIHB defined in the Communiqué: Tranche DIHB and General DIHB. Tranche DIHB is the DIHB formed by debt instrument holders of one or more tranche issuances of debt instruments. The General DIHB defines a larger DIHB, comprising of the debt instrument holders of all issuances of the issuer, convened upon investors’ concern that their rights are being violated under a Tranche DIHB which they are not a part of. 

In addition to these two types of DIHBs, holders of covered bonds and secured debt instruments will constitute a separate Tranche DIHB apart from investors holding unsecured debt instruments.

When does a Debt Instrument Holders’ Board convene?

In principle, DIHB convenes upon a specific request; however, pursuant to the Communiqué, a Tranche DIHB must convene and grant an approval before certain actions can be taken. General DIHB serves as an control mechanism against Tranche DIHB resolutions.

Obtaining a Tranche DIHB resolution is mandatory, among others, for the following cases:

• Amendments on interest rate, maturity, principal and other fundamental terms and conditions of the debt instrument as recorded in the Central Securities Depository or to other fundamental terms and conditions stipulated in the prospectus/issuance certificate of a tranche debt instrument that might influence the investment decision of the investors.
• If amendments are proposed to the undertakings made by the issuer in respect of its financial or operational standing (if any) in the prospectus or issuance certificate, whether these amendment proposals will require a Tranche DIHB resolution and the required meeting and decision quora shall be regulated in the prospectus/issuance document. Tranche DIHB resolutions of this nature do not require further approval of a General DIHB. 

Resolutions of Tranche DIHB and General DIHB

The Communiqué also regulates the quorum for DIHB resolutions and their effects on other investors:

• The decision quorum for the Tranche DIHB is set out as those holding at least two thirds majority of the nominal value of the trading debt instruments of the same tranche. Prospectus and/or issuance document may set out a higher decision quorum. 
• DIHB resolutions must be approved by the board of directors of the issuer within three business days, otherwise they will be rendered void. 
• If a resolution taken at a Tranche DIHB and approved by the board of directors is violating their rights, debt instrument owners holding at least twenty percent of the nominal value of trading debt instruments of other tranches may request a General DIHB meeting. Such request must be made within five business days following the approval of the board of directors. Should this period lapse, a General DIHB meeting may not be requested and the Tranche DIHB resolutions will become final.  
• Resolutions taken at Tranche DIHBs and approved by the board of directors will also apply to other debt instrument holders of the same tranche who either (i) did not vote affirmatively in approval of the resolution or (ii) did not attend the DIHB despite the announcement for such DIHB being duly made. 
• If requested, General DIHB will convene in fifteen business days following the approval of the Tranche DIHB resolution by the board of directors. Provided that the announcement was duly made, if a General DIHB meeting cannot convene during this period with the attendance of those holding at least two thirds majority of the nominal value of the trading debt instruments, the Tranche DIHB resolution will become final. 
• General DIHB resolutions require the approval of debt instrument holders representing more than two-thirds of the total nominal value of the tranche which are entitled to participate in the General DIHB. Moreover, the agenda of the General DIHB may only include resolutions taken in Tranche DIHB which are approved by the board of directors and which violate the participants’ rights. If the General DIHB overrules the Tranche DIHB’s resolution, the Tranche DIHB resolution in question will not come into force.  
• Debt instruments owned by the issuer itself and/or its related parties will not be taken into account in respect of meeting and/or decision quorum at DIHBs.

Debt Instrument Holders’ Representative

A debt instrument holders’ representative (“Representative”) may be appointed to represent one or more tranches. Representative may be appointed by the affirmative vote of debt instrument holders representing more than 50% of the nominal value of the tranches to be represented. 

The Representative may also be appointed in the prospectus or issuance certificate. The Representative may be removed with the vote of debt instrument holders representing more than 50% of the nominal value of the tranches to be represented. Appointment and removal, appointment requirements, duties and authorities, fees and other remunerations of the Representative will be set out in the prospectus or the issuance certificate.  

Procedural rules governing Tranche DIHB and General DIHB

DIHB meetings must be convened physically. However, DIHB may also adopt a resolution without a physical meeting by circulation of the relevant decision physically and/or electronically and execution of the same by the debt instrument holders or their representatives.

Issuers offering debt instruments to the public and listed companies are required to provide electronic access to DIHBs in addition to physical access. The CMB may send observers to DIHB meetings if necessary. Moreover, it is mandatory for the issuers to make material events disclosure about DIHBs.  

The Communiqué sets forth that the following points in relation to DIHBs will be highlighted in the prospectus or the issuance certificate:

• Invitation to DIHB meetings
• Method of invitation
• Announcement of the meeting and setting out its agenda
• Meeting organization and covering its costs
• Criteria for determining attendees
• Form of proxies for attending the meeting
• Chairmanship and management of the meeting
• Approval of meeting resolutions by the board of directors of the issuer
• Time periods for objecting to resolutions and gaining legal effect
• Cases where the Tranche DIHB may be convened, regardless of whether investors’ investment decisions will be influenced and meeting and decision quora for such meetings
• Other matters involving voting quorum and required majority for resolutions

Covered bonds and other secured debt instruments 

Holders of covered bonds and secured debt instruments will form a separate Tranche DIHB amongst themselves apart from investors holding unsecured debt instruments. 

In addition, holders of covered bonds and secured debt instruments may not participate in General DIHB meetings. The following cases are exempt from this rule:

• If the relevant debt instrument holder has partial security, the holder has a right to participate in the General DIHB for the unsecured portion.
• If new securities are granted at Tranche DIHBs affecting the rights of holders of covered bonds and secured debt instruments, the holders of such covered bonds and debt instruments have a right to participate in the General DIHB.

Debt instruments issued abroad

Debt instruments issued outside of Turkey fall outside the scope of the Communiqué. 

Issuer’s default and restructuring 

Pursuant to the Communiqué, prospectus or the issuance certificate must clearly include the type and scope of the issuer’s obligations in relation to the debt instrument and a definition for the events of default together with concrete examples of such events of default. 

If the terms and conditions of a debt instrument are amended after an event of default, the Communiqué regulates that:

• All claims which were initiated due to the event of default will be suspended as of the time of adoption of the amendment resolution,
• Provisional injunction and provisional attachment proceedings will not be executed,
• Statutory limitations that can be interrupted with an execution proceeding will not run, and
• Execution proceedings will be dismissed after all debt arising out of the debt instrument is paid.