Issuers with outstanding fixed-to-floating or floating rate preferred securities or depositary shares representing an interest in underlying preferred securities will soon need to consider how to address operative LIBOR-based provisions in advance of the cessation of LIBOR. The governing documents for many outstanding depositary shares and preferred securities that reference LIBOR do not envision a permanent cessation of LIBOR.
An issuer seeking to amend the terms of an outstanding preferred security must comply with the provisions of the underlying governing document (in Delaware, the Certificate of Designations). Typically, the Certificate of Designations provides that in the case of an amendment that would adversely affect the special rights, preferences or privileges of the outstanding preferred security, the issuer must first obtain approval from the holders of at least a majority or supermajority of the outstanding shares, voting separately as a single class from any other outstanding series of preferred stock. However, the Certificate of Designations can typically be amended without holder consent so long as an amendment does not adversely affect the rights, preferences, privileges and voting powers of the particular series.
In the absence of a sufficient number of available LIBOR quotes, the Certificate of Designations will often include language that will look back to the last available LIBOR quote in effect for the prior dividend period. The absence of newly available LIBOR quotes would practically result in a fixed rate preferred security. The inclusion of a new floating rate standard (in the absence of newly available LIBOR quotes) may be consistent with the intention of having offered investors a floating rate preferred security. Issuers wishing to resolve this potential problem may want to consult counsel regarding these securities, which have gotten significantly less attention than have floating rate notes.