The Research On The Legal Protection Of Bondholders' Rights And Interests

The development of the securities market relies to a large extent on the protection of the investors. This doctrine is also true of the corporate bonds. To protect the corporate bond investors could be boiled down to defend the investors against the market-irrelevant risks with the reference made to breach and default risk caused by factors other than interest rate risk, inflation risk, industry risk, bond transaction risk or liquidity risk and risks alike. In this article, the author attempts to conduct an in-depth research on the breach and default risks arising out of or in connection with bond-issuing corporate itself. This kind of breach and default risk is fundamentally caused by the conflict of interest between bondholders and issuing corporate. Furthermore, the conflict of interest constitutes the debt agency cost which is integrated with the equity agency cost arising out of the conflict of interest between managers and shareholders as the agency cost.The underlying reason behind the debt agency cost between the bondholders and issuing corporate relies in the fact that the shareholders bear limited liability toward the corporate debt to the extent of the capital contribution made to the corporate and they get non-intervened and exclusive voting right over the material affairs of the corporate unless the bondholders could make contradictory rules on the voting right and limited liability. Thus the debt agency cost paradigm between bondholders and issuing company could be deconstructed and transformed into agency cost between bondholders and shareholders. Besides this, managers as the shareholders interests promoter makes the agency cost between shareholders and bondholders as routine occurrence. The debt agency cost could be categorized as cost between bondholders and issuing corporate, cost between bondholders and shareholders and cost between bondholders and managers.In essence, all corporate creditors have to fend against the debt agency cost through contract entered into between themselves and corporate as the debtor. However, the effectiveness of contractual solution toward debt agency cost varies among different groups of creditors. To neglect this contractual difference in minimizing debt agency cost is subjective and not feasible. To take the involuntary creditors as an extreme example, considering the fact that involuntary creditors like torts claimers don't enter into any de facto or real contract with the corporate for the sake of minimizing their physical injury or property damage, most common law countries is willing to pierce the corporate veil in terms of granting relief toward tort claimers of the corporate when the corporate fails to cover the losses suffered by and damages inflicted upon tort claimers. Although bondholders are quite different from tort claimers in that they are voluntary creditors and they do enter into the contract with the corporate with regards to the interest rate, payment terms, breach and default relief, and restricted usage of the company asset as well as things which are expected to influence the probability of the bond realization. In light of the boiler plate of the bond contract, the contract between the bondholders and issuing corporate does not deserve the contract name in the real sense featured by equality on information basis and in terms of negotiation power. Besides, collective cooperation difficulty engulfs the bondholders' action as a homogeneous group. The best alternative choice is to wait someone else within the group to identify, discover, monitor and control the debt agency cost. The collective problem is characterized by the rational apathy and passive waiting. Considering the contract incompleteness and market failure in addressing the debt agency cost between bondholders and issuing corporate, the institutional ex parte regulation is necessary otherwise agency cost will inevitably lead to adverse selection prior to entering into the bond contract and unavoidably result in the conflicts of interests which undermines the bondholders rights and interests and in the long run has a material adverse effect on the corporate bond market.Since Jensen and Meckling put forward the agency cost concept in 1976, equity agency cost since then having dominated the research focus. The debt agency cost solution is constrained within the contractual framework. Research conducted on the debt cost from the legal and institutional perspective is a rare sight. The author is confirmed in the belief that to explore the debt agency cost from the legal perspective shall be much more conducive to the protection of the bondholders. Underlying reason behind the debt agency cost is reciprocal with the issuing corporate on one hand and bondholders on the other. Thus the legal regulation of the debt agency cost shall be made on two aspects with the issuing corporate on one hand and bondholders on the other. On the issuing corporate side, the basic rules among the bondholders and shareholders as well as bondholders and managers shall be established. Especially, the equitable relationship between shareholders and bondholders in basic and most aspects resembles that between oppressed minority shareholders and controlling shareholders under the close company lock-up scenario. So the author put forward the proposition that the company law shall establish the fairness rights of the bondholders toward shareholders to protect themselves against unfair prejudicial losses. Furthermore the author disagrees with the fiduciary relationship between managers and bondholders, since it will render the managers into an awkward situation straggled between shareholders and bondholders without the clear-cut relevant guiding principles. Conversely, the relationship between bondholders and managers relies on that between bondholders and shareholders. On the bondholders side, a collective cooperation mechanism shall be established to alleviate the rational apathy problem within the bondholders. A desirable collective cooperation mechanism is comprised of initiating mechanism, voting items and voting efficacy.