5

A company issues a convertible bond to an investor. It has a par value of $10,000 and can be converted into 5 shares.

The company currently has 50 outstanding shares, so the bond corresponds to ~9% (5/55) equity, should it be converted right away.

Say now that the majority shareholders later choose to issue 1,000 new shares among themselves. The bond has now been diluted and will only yield ~0.5% equity upon conversion.

What is to prevent this from happening? Are convertible bond holders treated as minority shareholders even before they convert to equity? Do they have preemption rights?

  • 2
    I wouldn't be surprised if there's some rule about the bond needing to stay at 9% equity and thus convert to 91 shares. Still, it's a good question. – RonJohn Jun 1 at 3:25
1

There are 2 things:

  • Laws in general.
  • The terms of the convertible note. It would be a very stupid lawyer writing up the note (or checking it from the other side) that would ignore a trivial fact like this, so if laws do not cover it, then - well - obviously the lawyers better have prepared for this.

And as we do not have the text of the note - yeah, no answer possible on that side.

  • Do you have some details on what laws or kinds of laws would be relevant? – Ganesh Sittampalam Jun 1 at 13:17
  • Yeah. The relevant laws. See, that depends on jurisdiction and guess what - the question is not tagged at all with geographic information. – TomTom Jun 1 at 14:33
  • Well, that's what I mean about "kinds of laws". Like most jurisdictions have laws about murder and fraud and things, even if they are written differently in each. – Ganesh Sittampalam Jun 1 at 14:35
  • And guess what, if you have a stock company (which you need for shares) in a jurisdiction, they ALSO have laws about dilution and shareholder protection. – TomTom Jun 1 at 14:42

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.