Provision

What is a 'Provision'

A provision is a legal clause or condition contained within a contract that requires one or both parties to perform a particular requirement by some specified time or prevents one or both parties from performing a particular requirement by some specified time. For example, the anti-greenmail provision contained within some companies' charters protects shareholders from the board wanting to pass stock buybacks.

BREAKING DOWN 'Provision'

Although stock buybacks can be a good thing for shareholders, some buybacks allow board members to sell their stock to the company at inflated premiums. Provisions protect the interests of one or both parties in a contract. The following are examples of provisions.

Sunset Provision

A sunset provision automatically repeals a law or statute on a specific date, unless legislators or company executives reenact the law or statute. For example, a sunset provision in an insurance policy limits a claimant’s time for claim submission on a policy. If the claimant does not act within the defined period, rights to make a claim are forfeited.

Sunset Provision and the USA Patriot Act

According to the USA Patriot Act, the National Security Agency’s authority for collecting bulk telephone metadata, including who calls whom when, expired at midnight June 1, 2015. As a result, the government has fewer methods of preventing terrorism. Although Senate Majority Leader Mitch McConnell sought a two-week extension of two less-controversial provisions of the Patriot Act, Senator Rand Paul of Kentucky objected to the surveillance programs, citing violations of the Constitution. The two other programs involved roving wiretaps that helped the Federal Bureau of Investigation (FBI) use warrants when tracking terrorism suspects who frequently switch cellphones, and a never-used program for monitoring potential lone wolf suspects not tied to terrorist groups. Any investigations started before the sunset were allowed continuance.

Call Provision

A bond’s call provision is a specific date after which the company may call bonds. Investors turn in the bonds for the face amount or the face amount plus a premium. For example, a 12-year bond issue is callable after five years. The five years until the bond can be called is the hard call protection. Investors earn interest paid by the bond until at least the first call date. When an investor buys a bond, the broker typically provides the yield to call as well as the yield to maturity, showing the bond’s investment potential.

If a bond has a soft call provision, the provision goes into effect after the hard call provision passes. Soft call protection is typically a premium to par that the issuer pays for calling the bond before maturity. For example, after reaching the call date, the issuer pays a 3% premium for calling the bonds for the next year; a 2% premium the following year; and a 1% premium for calling the bonds more than two years after the hard call expires.