What is Consent Solicitation
Consent solicitation is the process by which a security's issuer proposes changes to the material terms of the security agreement. These changes are for investors, who hold a stake in the security. Given that mutual consent is usually required for such critical changes, the consent solicitation is usually a request for permission to make a change on behalf of the stakeholder.
Consent solicitations typically must be filed with the U.S. Securities and Exchange Commission (SEC). While both the SEC and states regulate consent solicitations, states often have the more important role.
BREAKING DOWN Consent Solicitation
A consent solicitation usually states a specific date by which stakeholders must respond to the issuer’s request to make a material change to the security agreement. The security issuer may enact changes if the required number or percentage of stakeholders agrees to the change(s). If less than the required percentage of stakeholders agrees to the changes, the measure fails, and the changes cannot be enacted.
Example of a Consent Solicitation
A common example of consent solicitation occurs within the bond market. If the original terms of an indenture are no longer in the best interest of the issuer and bond holders (affecting the viability of the bond issue) the issuer may approach the bond holders through a consent solicitation statement. Bond holders, who consent to the changes, may receive a consent payment.
Consent Solicitation and Activist Investors
While most major corporate changes occur at annual shareholder meetings; at times activist investors may make major changes privately, at a separate point. Following a written consent solicitation on behalf of one investor, or a group of investors, to the rest of the shareholders, activists will notify company management of the decision to make the change. In the majority of cases, this is regarding a change in company directors or executives although they can occur for a variety of reasons. Although most U.S. companies prohibit consent solicitations via their Certificate of Incorporation (CoI) or bylaws, a minority still accept changes in this form. The current figure is approximately 70% of US public companies limiting or prohibiting consent solicitations.
As noted above although both the SEC and states can regulate consent solicitations, states can have more power in these situations. Here, states are able to determine whether and how a company’s shareholders can solicit written consent. At the same time, the SEC oversees and regulates the specific process of solicitation.