LEGAL VIEWPOINT – Issuance of Bonds by Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

There are many alternative ways for companies to borrow money, if there is a need. Issuance of bonds by companies, is one of the suitable alternatives that could be pursued.  If so opted, the ordinary general assembly of a joint stock company, could borrow by issuing bonds on recommendations from the board indicating the limit, timing and conditions to issue bonds. Thereafter, there is a need for the approval of central banks if bonds are denominated in foreign currency or in local currency but offered internationally.

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Regulators as, Ministry of Finance, Central Banks and others must approve bonds issuance. Bonds shall be nominal or for bearer, negotiable, with equal value and categories and maturity date shall not be less than two years.

Legally speaking, bonds of the same issue shall entail equal rights to holders, and any provision to the contrary shall be void. Moreover, companies shall not issue bonds unless the issued capital has been fully paid, the balance sheet and the profit and loss account for at least two financial years was published, unless the state or a public entity guarantees such bonds.

Regarding the value of bonds issued by the company, their total value shall not exceed the issued and fully paid capital and the undistributed reserves of the company, according to the balance sheet approved by the general assembly. As exception to this rule, are bonds guaranteed by the state or by public entities and bonds issued by banks and companies subject to the supervision of Central Banks.

The company shall cover the value of bonds through, offering bonds for public subscription. In this case the provisions applicable to subscription of shares shall apply without prejudice to the nature of the bonds. Or by selling bonds through banks, companies and subscription underwriters. In this case, the practice used, shall be followed in a manner that does not conflict with the provisions of the law.

The call for public subscription for the bonds shall be made by a prospectus approved by the competent authorities and published in newspapers. The prospectus shall contain details, including, the resolution of the general assembly authorizing the issue, date and approval of the competent authority, the total amount of the loan, essential details included in the bond certificates as provided in the law, summary of the balance sheet and the profits and losses account for the two financial years preceding the issue of bonds, value of the previous bonds and the outstanding unpaid value at the time of issuing the new bonds, the entity conducting the subscription of bonds, amount to be paid for each bond if payment in installments, period specified for subscription, period wherein owners of convertible bonds may express desire to convert them into shares, provided that such period shall not exceed the fixed term of bond amortization, extent to which shareholder may subscribe for convertible bonds, extent to which the company may amortize bonds and the conditions thereof,  list of board members…, etc.

Such details shall be included in all bond advertisements and bulletins and the prospectus shall be signed by the chairman and the auditor, who shall be jointly liable for the accuracy thereof. Subscription shall be deemed complete if 50% or more of the bonds are covered during the specified period or any extension, otherwise, the general assembly to retract and refund money to subscribers or take the subscribed portion and accordingly cancel remaining bonds.

Details in bond certificates, shall include, name of issuing company, Commercial Register, office address, capital of issuing company, total amount of the bond, name of the bond’s owner if the bond is issued in the owner’s name, nominal value and serial number of the bond, interest rate or the return and  due dates, or the annual share determined for the bond from the company’s profits, bond collateral if any, conditions and dates of bond amortization and if bonds are convertible into shares, the dates specified for bond owner to convert and the conditions thereof shall be mentioned.

If conditions provided for in the law for issuance of bonds are violated, any interested party may initiate legal proceedings to nullify the subscription and to compel the company to refund the value of the bonds and to pay compensation for sustained damages. Therefore, companies are to be vigilant and very careful in abiding by the law so as to keep away from legal questioning.. Likewise, potential investors are to be fully aware of their rights given by the law.

There are other legal issues to be detailed later on….