Fundamentals

Collective Action Clauses: What They Are and How They Work

By Daniel Sardá · Published on October 22, 2026

6 min read1,283 words

Collective action clauses allow a qualified majority of bondholders to approve certain amendments that bind all holders. Their scope depends on the contract.

Collective action clauses, or CACs, are provisions included in some sovereign bonds. They allow a qualified majority of bondholders to approve certain changes to the bond’s terms and, where the agreed conditions are met, make those changes binding on holders who voted against them or did not participate.

They do not give a government the power to rewrite its debt on its own. They are rules built into the contract when the bond is issued. Their purpose becomes especially clear when a country needs to restructure debt: how can many creditors, with different interests and expectations, reach a common decision?

Key idea: A CAC is not a haircut or an automatic restructuring. It is a contractual rule for deciding whether certain changes may be approved by a majority rather than requiring unanimity.

The problem CACs are meant to solve

Changing the terms of sovereign debt may involve the principal, interest, or maturity date. If every creditor retained an absolute veto, a proposal acceptable to almost everyone could still fail because of a small minority.

That creates a coordination problem. One creditor may decline an exchange offer in the hope of demanding full payment later, while the others accept a reduction or an extension. Such a dissenting creditor is often called a holdout. Someone may also accumulate enough bonds in a particular series to form a blocking minority.

Not every dissenting creditor acts in bad faith: they may regard the offer as unfair or the information as insufficient. The challenge is to avoid an individual veto without turning the will of the majority into unlimited power.

CACs address that tension through rules known in advance. They specify what may be changed, who may vote, which majority is required, and when the result binds the affected group.

How a vote works

The precise procedure depends on the wording of each bond, but its general logic can be summarized in four steps:

1. The issuer proposes an amendment to one or more terms covered by the clause.
2. Bondholders receive information about the proposal and the voting procedure.
3. Votes are counted under the method and threshold set by the contract.
4. If every requirement is met, the amendment applies to the included bonds, including those held by the dissenting minority.

A hypothetical example helps illustrate the point. If a bond series requires 75% to approve an amendment, 74% support is not enough; 76% may bind the rest. But that figure does not define every CAC. Another bond may establish different thresholds, subjects, or aggregation mechanisms.

The clause does not allow every term to be changed. Contracts commonly identify reserved matters that require enhanced majorities, such as principal, interest, maturity, currency, or ranking. The exact list must be checked in the applicable instrument.

Three ways of counting majorities

The structure of the vote matters as much as the percentage. Modern contractual models provide several options.

Series-by-series voting

Each bond issue or series votes separately. An amendment is approved for a series only if it reaches the required threshold in that series. This system lets the holders of each issue control their own terms, but it can also make it easier for a minority concentrated in one series to block an agreement for that series.

Two-limb aggregated voting

The proposal must pass two tests at the same time: a majority across all included bonds and a majority within each series. This coordinates multiple issues without entirely removing the weight of each individual series.

For reference, the enhanced model circulated by the International Capital Market Association includes, among its options, more than 66⅔% of aggregate principal and more than 50% in each series. Those are model parameters, not a rule that applies to every sovereign bond.

Single-limb aggregated voting

The included bonds are counted together and must meet an aggregate majority, without a separate decisive vote in each series. The International Monetary Fund describes a model that uses 75% in aggregate when the proposal is uniformly applicable to the affected holders.

This approach makes it harder to block an entire operation by buying a decisive position in a single series. At the same time, it makes safeguards concerning information, treatment, and the form of the offer particularly important.

Useful distinction: In series-by-series voting, every issue must pass its own test. In aggregated voting, several issues are considered together, either with a second series-level test or without one.

Benefits, safeguards, and limits

For the issuer and for a majority of creditors, a CAC can reduce the risk that a small position will prevent a broadly supported restructuring. It also provides a predictable procedure where otherwise every holder’s consent might have to be sought.

For the minority, however, the mechanism means losing the power to preserve the original terms unilaterally once the agreed majority has been reached. The fact that this possibility was included in the bond from the outset gives it a contractual basis, but it does not make every proposal fair or remove the duty to follow the procedure.

Safeguards found in enhanced models include duties to provide information, the exclusion from voting of securities controlled by the issuer, and, for certain aggregated votes, a requirement that the proposal be uniformly applicable. The latter is intended to prevent a debtor from assembling a majority by offering discriminatory terms to selected groups. By itself, it does not guarantee an economically equitable result.

From the standpoint of freedom of contract and legal certainty, the value lies in rules that are clear, public, and known before a conflict arises. But initial consent does not make transparency, the promised equal treatment, or the protection of legitimate expectations irrelevant. A majority rule helps coordinate; it does not replace the rule of law.

CACs also have a limited scope. They do not determine whether debt is sustainable, provide financing by themselves, or resolve disputes among every class of creditors. Nor do they necessarily cover debt issued under other contracts or without equivalent clauses. Academic evidence collected by researchers at the European Central Bank indicates that they can reduce holdout risk, but they are not a complete solution to sovereign debt crises.

Caution: To know what may be approved and by which majority, the specific bond must be read. The jurisdiction, reserved matters, included series, and counting method can all change the result.

Not a class action lawsuit

The term may be confused with a procedural class action, such as a lawsuit brought on behalf of a group of consumers or workers. They are different institutions.

A CAC is written into the terms of a bond and organizes decisions among its holders. A class action takes place before a court and allows the claims of multiple people to be handled together. Nor should a CAC be confused with an exchange offer: the exchange is the transaction being offered; the clause is one of the rules that may help approve amendments or make them binding.

A coordination rule, not a blank check

Collective action clauses replace unanimity with an agreed form of majority decision-making within defined limits. In doing so, they can facilitate a restructuring and reduce blocking power, but they shift part of the risk to those left in the minority.

Their practical legitimacy depends on more than reaching a percentage. The content of the contract, the quality of the information, the way votes are counted, and the treatment of creditors all matter. Understood this way, a CAC does not automatically favor either the government or bondholders: it creates a framework for making a difficult decision without allowing coordination to erode the contractual safeguards it is meant to organize.