Research On The Legal Protection For The Convertible Bondholders' Interest

Convertible bond is a compound security involved the intersection of several different interests. The laws which govern the convertible bonds are related to different kinds of law sectors, but they are quite incomplete and sometimes contradictory that cannot provide a systematic basis for convertible bonds in China. So, the convertible bonds are prone to become a tool for the issuing firms to cheat the investors of money. Therefore, it destroys the development of convertible bonds in China.The fundamental purpose to protect the interest of Convertible Bondholders lies to the following points: to change the subordinate statues of the bondholders compared with the shareholders; to prevent the shareholders from infringing the right and interest of the bondholders, to balance the interests among bond-issuing firms, the shareholders, and the convertible bondholders; to reduce the investment risk of the convertible bondholders ; Thus the convertible bondholders could exert its significant economic function and enrich the security market in China. Therefore, this paper explanatorily researches the issues related to the protection for the convertible bondholders in China.This paper begins with the convertible bond and the right of its holders, and presents the concept, legal characteristics, basic factors of convertible bond, as well as its advantages from the perspectives of the investors and issuers. It makes a general illustration on the mail right entitled to the convertible bondholders, and a further analysis of the necessity of the protection for the bondholders. Finally, some legislative suggestions relevant to the perfection of legal protection for convertible bondholders in China are proposed in accordance with the reality in China.In the introduction, the background of choosing this theme and the current legislation on the convertible bond in China are presented, from which infers the reason for writing this paper. The first chapter introduces the convertible bond and the right of its holders. In the first the concept of convertible bond is identified, and the legal characteristics including credit, stock equity, and convertibility. In the following, it presents the basic factors of the convertible bond, analyses its advantages from the perspectives of investors and issuers, and further generalizes the main rights entitled to the bondholders. From the point of view of the author, the right through which the bond can be converted to the share of the issuing firms is one of the distinctive features differing from other types of the bond. Therefore, the right of convertibility is of crucial importance to the convertible bondholders. In addition, the claim for the bond interest prior to the convert, for the clearing of the principal and interest from the issuing firms, and the entitlement of witness right and just claim on the bondholders should be the main components of the right entitled to the bondholders.In the second chapter, there are three sections arguing the necessity of the protection for the convertible bondholders. Firstly, through the protection for the interest of convertible bondholders, the transparency of the corporate information release could be enhanced, and the bondholders could have a better understanding on the corporate operation. Thus the bondholder can participant in the corporate management comparatively so that they can enforce the right whenever necessary, balance the interests among the bondholders, shareholders and issuing firms, and solve the dilemma in which the bondholder hold a inferior position in the interest structure of company. Secondly, through the application of the measures to protect the interests of convertible bondholders, the perfection of the specific issuing and convert conditions of the bonds, and the establishment of the related law and regulation, it is benefit for reducing the default risk that the convertible bondholders may confront, the risk of attenuation of the convert right, and the risk caused by the degradation of the corporate operation. Finally, through taking the measures to protect interest of the convertible bondholders such as referring to the regulations of other nations and introducing a series of scientific and reasonable protection systems like put system, anti-attenuation system, and the credit ranking system, etc. the working capital ratio and efficiency in the whole security market may be enhanced. It will benefit regulating the behaviors of the parties who issue the bond, and bring more new ideas and options for corporate management. Thus, a good market system could be established with ease, the investment environment will be improved, and the security market will develop in a more healthy way.In the third chapter, this paper makes proposals on how to perfect the legal protection system for the convertible bondholders'interest through the evaluation on the relevant legal system of other nations and connection to the reality in China. The author holds the view that when the performance of the share price of the issuing firms is not good enough, and it is hard for the investors to convert the convertible bond to the share of the issuing firms, the right should be entitled to the bondholders, and the put terms for China should be laid down by referring the practices and conventions nationwide. Mean wile, through the study on the anti-attenuation measures of other nations, the legislative suggestions are proposed for those in China, assuming that the law should introduce the anti-attenuation terms and make them the legislative components in the statement of assignable bond collection, whose contents could be defined by the parties at will. Finally, it suggests that the regulations of convertible bondholders'conference system in the nations under continental legal system should be introduced in order to enforce the protection for the whole interest of the convertible bondholders in China, and presents the aspects including the organization, the holding, the decision-making rules, and the force of the decision of this conference. Moreover, regarding the limited number, complex procedures and the high cost of the conference held by the bondholders, a legal mechanism which provides regular and constant protection for the bondholders is in need. Meanwhile, the fiduciary system under the Anglo-American law system with the features of low cost, easy operation, etc. will make up the defects in the conference system. Thus, combination between the conference system and the fiduciary system could be used for illustrating how to establish the mechanism for protecting the whole interest of the convertible bondholders in China.