Why Voting Rules in Lending Agreements Matter – A Lot

01-12-2026

It is easy to overlook the voting rules for lenders to amend loan contracts, but they quietly determine how much flexibility a company has when things get bumpy. A recent paper coauthored by the Daniels School’s Judson Caskey and forthcoming in the Journal of Accounting Research shows that the way you set these voting thresholds can either protect value or quietly destroy it through bad projects or unnecessary renegotiations.

The basic idea

In a syndicated loan, many lenders share the same deal, and the contract specifies the fraction of lenders required to approve changes in key terms like financial covenants. For example, a loan agreement may restrict a borrower’s expenditures when the borrower’s ratio of Debt to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) exceeds a specific value; however, the contract typically allows some fraction of lenders — the “required lenders” — to waive the restrictions. The most and second-most common fractions are lenders with 51% and 67%, respectively, of the loan commitment. The required lenders can approve amendments to loan agreements, aside from those that directly impact payment terms (e.g., interest, loan commitments and payment schedule). When a covenant is breached, that voting rule decides whether the breach is permanently or temporarily waived, or whether the company must renegotiate the loan to lift restrictions or avoid default.

Covenant breaches are often triggered by accounting or performance measures that are noisy — a temporary dip in earnings can cause a “false alarm” even when the company faces no ongoing difficulties. After a breach, lenders can either waive covenant restrictions on activities such as capital expenditures and dividends, or refuse and force the firm to renegotiate, which takes time and often leads to higher spreads, fees or tighter terms.

Why voting thresholds matter

Not all lenders think alike. Some value a long‑term relationship or future deals and are willing to be lenient; others are tougher and may even use false alarm covenant breaches as an opportunity to extract value from borrowers via higher loan spreads. Caskey’s paper, “Amendment Thresholds and Voting Rules in Debt Contracts,” labels this difference as variation in lenders’ “private benefits” from being flexible. High‑benefit lenders are more likely to waive even in bad times; low‑benefit lenders are more likely to refuse waivers and demand concessions.

That mix creates a tradeoff when choosing the voting rule:

• On one hand, if the threshold is so low that very lenient lenders hold the marginal vote, they may waive covenant violations and lift restrictions even when the violation signals long-term trouble for the borrower.

• On the other hand, if the threshold is so high that the marginal vote resides with lenders who may behave opportunistically, then lenders may enforce restrictions after covenant violations that are a false alarm. This can force borrowers to defer valuable investments or renegotiate the loan with higher interest to entice lenders to allow continued investment.

The “optimal” rule aims to place the marginal vote with lenders who are not so lenient that they ignore covenant violations signaling trouble but are also not so opportunistic that they use false alarm covenant violations to extract value from borrowers.

What the data say

The authors examined more than 17,000 syndicated loans and document what voting rules look like in practice. About three‑quarters of U.S. syndicated loans require 51% of the loan principal to approve most amendments, with the rest using higher cutoffs such as two‑thirds.

They find patterns that match the theory:

• When the syndicate includes more lenders who are likely to be lenient, such as those with strong prior relationships with the borrower, contracts tend to set stricter thresholds so that those friendly lenders cannot easily push through waivers in bad times.
• When the syndicate includes more lenders who are likely to be opportunistic, such as hedge funds, the contracts tend to use lower voting thresholds so that these tough players cannot block waivers too easily and drag borrowers into renegotiations unnecessarily.
• Deals with more performance covenants (more ways to trip a breach) tend to set more lenient voting rules to offset the higher risk of technical default.

Practical takeaways for business

For CFOs, treasurers and board members, there are clear implications:

• Do not treat the required‑lenders percentage as boilerplate. A shift from 51% to 67% meaningfully changes how easy it is to get relief when covenants are tripped.
• Think about who is in your syndicate and what they want. If you lean on relationship banks that want future business, expect other lenders to demand higher voting thresholds or tougher structures.
• If your loan has many performance covenants or very conservative accounting triggers, push for more flexible waiver rules so that technical breaches do not always force a costly renegotiation.
• For lead arrangers, design the syndicate and the voting rule together: mixing lender types and setting a balanced threshold can reduce internal conflicts and keep the covenant package effective rather than purely punitive.

“The main takeaway is that companies can use lending agreements’ voting rules to mitigate inefficiencies that result from covenant violations,” Caskey says. “A carefully set voting rule results in the marginal vote residing with lenders who waive covenants after a false alarm, but not when the covenant violation indicates that borrowers should place restrictions on lenders.”

The big picture: amendment thresholds are a powerful, underappreciated design choice in debt contracts. Getting them right can help firms keep good investments alive in rough periods while still stopping truly bad bets before they burn value.