In the current economic context, the trading of corporate bonds has become increasingly active and widespread. Corporate bond purchase and sale contracts serves as the legal basis for the parties to exercise their respective rights and obligations and is regarded as an important instrument for protecting their legitimate interests. What, then, is a corporate bond purchase and sale contract? How does the law regulate purchase and sale contracts of corporate bonds? Let us explore these issues together with NPLaw through the following contents.
In the current economic context, the trading of corporate bonds has become increasingly active and widespread. Corporate bond purchase and sale contracts serves as the legal basis for the parties to exercise their respective rights and obligations and is regarded as an important instrument for protecting their legitimate interests. What, then, is a corporate bond purchase and sale contract? How does the law regulate purchase and sale contracts of corporate bonds? Let us explore these issues together with NPLaw through the following contents.
I. Overview of purchase and sale contracts of corporate bonds
1. What is a purchase and sale contract of corporate bonds?
A purchase and sale contract of corporate bonds is a written agreement between the bond-issuing enterprise and the investor regarding the purchase and sale of corporate bonds.
Corporate bonds are securities with a maturity of one (01) year or more, issued by enterprises, which certify the lawful rights and interests of bondholders with respect to a portion of the issuing enterprise’s debt.
2. Matters to be noted when entering into purchase and sale contracts of corporate bonds
When entering into the corporate bond purchase and sale contract, the following issues should be carefully considered:
- Trading in corporate bonds entails a high level of risk, as corporate bonds are issued by enterprises on their own account and the issuing enterprises take full responsibility for their debt repayment capacity. Accordingly, if the issuing enterprise is unable to repay principal and interest, investors may suffer significant losses.
- When entering into the corporate bond purchase and sale contract, it should be noted that in the case of privately placed corporate bonds, only professional securities investors are eligible to purchase such bonds; other entities are not permitted to enter into contracts for the purchase and sale of such a type of bonds.
- A clear distinction must be made between issuance underwriting and payment guarantee. Issuance underwriting refers to a commitment by the underwriting organization to the issuing enterprise to distribute the bonds to be issued and does not entail any obligation toward investors. Therefore, investors must clearly distinguish such a matter in order to protect their interests.
In addition, when entering into the corporate bond purchase and sale contract, investors should carefully assess the collateral, particularly where the collateral consists of future-formed real estate or shares. Given the volatility of the real estate and securities markets, the value of such collateral may decline and become insufficient to secure repayment to investors.
II. Legal regulations governing purchase and sale contracts of corporate bonds
1. Essential clauses of the purchase and sale contract of corporate bonds
The corporate bond purchase and sale contract generally includes the following essential clauses:
- Clause on the subject matter and contents of the contract;
- Clause on the contract value;
- Clause on payment terms;
- Clause on the rights and obligations of the parties;
- Clause on contract termination;
- Clause on dispute resolution;
- Clause on effectiveness.
Accordingly, when entering into the corporate bond purchase and sale contract, the parties must clearly stipulate the contractual terms in order to define their respective rights and obligations and thereby minimize disputes arising during the execution of the contract.
2. What contents are included in the detailed purchase and sale contract of corporate bonds? Which content is the most important, and why?
The detailed corporate bond purchase and sale contract typically includes the following main contents:
- Information of the parties to the corporate bond purchase and sale contract;
- Name of the bond, purpose of bond issuance, and purpose of bond holding;
- Quantity and par value of bonds purchased, bond purchase price, total bond purchase amount, and bond interest rate;
- Method of payment of bond principal and interest;
- Bond term and payment method;
- Form of security and value of secured assets (if any);
- Handling of contractual breaches by the parties and settlement of disputes arising from the corporate bond purchase and sale contract.
In addition to the above basic contents, the parties may agree on other provisions, provided that such provisions are consistent with applicable laws.
Among the contents of a corporate bond purchase and sale contract, provisions on dispute resolution are considered the most important. Normally, conflicts and disputes are likely to arise during contract execution; having clear dispute resolution provisions enables the parties to address issues promptly and effectively. In practice, most contracts provide for dispute resolution through negotiation and mediation, followed by settlement by the Courts or Arbitration.
III. Questions regarding purchase and sale contracts of corporate bonds
1. Is notarization required for the purchase and sale contract of corporate bonds?
At present, there is no specific legal provision requiring corporate bond purchase and sale contracts to be notarized or authenticated. Accordingly, the parties are only required to sign the contract and may agree on whether to have it notarized. However, in order to enhance legal security and protect their interests in the event of a dispute, the parties are advised to have the contract notarized.
2. Is a sanction of 10% of the contract value permissible under the purchase and sale contract of corporate bonds?
Pursuant to Article 301 of the Commercial Law 2005, the sanction for breach of contractual obligations or the aggregate sanction for multiple breaches, as agreed by the parties, must not exceed 8% of the value of the breached contractual obligation. Accordingly, while the parties may agree on a penalty, it must not exceed 8% of the value of the breached obligation. Therefore, the parties to a corporate bond purchase and sale contract are not permitted to agree on a sanction of 10% of the contract value.
3. In which cases is the issuing enterprise required to redeem corporate bonds prior to maturity?
Pursuant to Clause 5 Article 1 of Decree No. 65/2022/ND-CP amending and supplementing Article 7 of Decree No. 153/2020/ND-CP, an issuing enterprise is required to redeem corporate bonds prior to maturity in the following cases:
First, early redemption in accordance with an agreement between the issuing enterprise and the bondholders.
Second, mandatory redemption at the request of investors where:
- The issuing enterprise violates regulations on the offering and trading of corporate bonds as determined by a competent authority, and such violation cannot be remedied or the remedial measures are not approved by bondholders representing at least 65% of the total outstanding bonds of the same type.
- The issuing enterprise violates the bond issuance plan, and such violation cannot be remedied or the remedial measures are not approved by bondholders representing at least 65% of the total outstanding bonds of the same type.
- Other cases specifically provided in the bond issuance plan in accordance with law (if any).
Accordingly, if any of the above cases applies, the issuing enterprise is required to redeem the bonds prior to maturity for investors.
4. Is an enterprise permitted to amend the terms and conditions of issued bonds?
Pursuant to Clause 3 Article 1 of Decree No. 65/2022/ND-CP amending and supplementing Article 5 of Decree No. 153/2020/ND-CP, for bonds issued in the domestic market, an enterprise may amend the terms and conditions of the bonds only if the following requirements are satisfied:
- Approval by the competent authority of the issuing enterprise;
- Approval by bondholders representing at least 65% of the total outstanding bonds of the same type.
Accordingly, an enterprise may amend the terms and conditions of bonds if such amendments are approved by the competent authority of the enterprise or by bondholders representing at least 65% of the total outstanding bonds of the same type.
IV. Legal advisory and procedural services relating to purchase and sale contracts of corporate bonds
NGOC PHU LAW COMPANY LIMITED has extensive experience in providing legal advisory services and implementing procedures relating to purchase and sale contracts of corporate bonds. Our services include:
- Receiving and reviewing information and documents related to corporate bond purchase and sale contracts;
- Guiding the parties in preparing dossiers and documents for negotiation, execution of contracts, and implementation of procedures related to corporate bond purchase and sale contracts;
- Assisting clients in drafting corporate bond purchase and sale contracts and working with competent state authorities;
- Providing advice on other matters related to corporate bond purchase and sale contracts.
The above constitutes the contents that NPLaw wishes to share with clients regarding purchase and sale contracts of corporate bonds. Should you have any questions concerning the above issues or other legal matters, please contact NPLaw for timely support. Thank you very much.
