The Fall and Rise of the Exit Consent


Bond issuers wanting to restructure their distressed debt often propose an exchange offer, in which the issuer persuades its bondholders to swap their present holdings for new bonds capable of being honored. To guard against nonparticipating bondholders, issuers may pair their exchange offers with an exit consent. A use of a bond’s modification clause, an exit consent is a technique by which bondholders participating in the exchange also vote to impair the distressed bonds.

Use of the exit consent raises a contract question about the duty of good faith and fair dealing. For a quarter of a century, exit consents survived judicial scrutiny when they followed the Delaware case Katz v. Oak Industries Inc. Then, in a case emblematic of the recent Eurozone economic crisis, Assénagon Asset Management v. Irish Bank Resolution Corp., an English court found that the exit consent breached this doctrinal duty, seemingly upending Katz’s position as the seminal case on exit consents. This Note argues that such concern is misplaced, concluding that Assénagon augments but does not replace Katz. It proposes reconciling the two cases in a manner that upholds the common values of each case in an effort to provide stable legal principles amid markets in flux.