Consent Solicitation

What Is a Consent Solicitation?

A consent solicitation is a process by which a security 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 a more important role.

Consent solicitations can also refer to any proposed changes that a corporation's board wishes to enact outside of a company's shareholder meeting, seeking written consent from its shareholders to do so.

Understanding a Consent Solicitation

Typically, a corporation makes important company decisions at its annual shareholder meeting, such as deciding on its board of directors. However, oftentimes decisions need to be made outside of the annual shareholder meeting, and this is when a consent solicitation comes into play.

A corporation can make a proposal and seek consent from its shareholders to enact the proposed change. In general, a consent solicitation can apply to any corporate action.

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 agree to the change(s). If less than the required percentage of stakeholders agree to the changes, the measure fails, and the changes cannot be enacted.

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. Though most U.S. companies prohibit consent solicitations via their Articles of Incorporation or bylaws, a minority still accept changes in this form. The figure is approximately 70% of S&P 500 companies limiting or prohibiting consent solicitations as of 2014.

A large reason for companies prohibiting consent solicitations is to prevent activist shareholders from taking over a company. It acts as a form of defense against any hostile takeovers.

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.

Example of a Consent Solicitation

A common example of consent solicitation occurs within the bond market. If the original terms of indenture are no longer in the best interest of the issuer and bondholders (affecting the viability of the bond issue) the issuer may approach the bondholders through a consent solicitation statement. Bondholders, who consent to the changes, may receive a consent payment.

For example, a corporation that issued bonds to investors may believe that a change in the interest rate or the maturity of the bond may prove beneficial to the stakeholders given the most recent economic forecasts. In this instance, the corporation would issue a consent solicitation to all bondholders, seeking permission to change the terms it believes would be beneficial to all parties involved.