July 6, 2021
Convertible loan: What should be considered when concluding convertible loan agreements
SberSolutions blog on Klerk.ru
A convertible loan is a convenient way to invest because investors can receive shares or equity stake in companies instead of debt repayment or interest. Thanks to changes in legislation, the structure of such transactions will be simpler, and they will be concluded faster, while protecting the rights of the parties.
What is a convertible loan agreement?
Under a convertible loan agreement, the lender requires the borrower (a non-public joint-stock company) to convert the loan, i.e. place additional shares of a certain category (type) to the lender instead of returning all or part of the loan amount and paying all or part of the loan interest when due or when other circumstances specified in the agreement arise. If the borrower is a limited liability company, the lender will be entitled to demand conversion of the loan, i.e. share capital increase, increase in the nominal value and size of the lender's share as the company's shareholder and decrease in the size of the other shareholders' shares, and if the lender is a third party, it will join the company, acquire a share in the company's share capital, and the size of the other shareholders' shares will be decreased.
Who cannot be a borrower under a convertible loan agreement?
- Credit institutions;
- Non-bank financial institutions;
- Strategic companies ensuring national defense and security;
- Privatized companies with shares owned by state or municipal authorities providing more than 25% of the votes at their general meeting of shareholders.
What conditions under a convertible loan agreement are material in addition to the
material terms of loan agreement?
material terms of loan agreement?
- The deadline and/or other circumstances upon the occurrence of which the lender is entitled to present a claim for loan conversion;
- The price for placement of additional shares or the procedure for determining it / the amount or the procedure for determining the amount by which the nominal value of the lender's share is to be increased as a percentage of the value of the additional contribution, and if the lender is a third party – the nominal value or the procedure for determining the nominal value of the acquired share as a percentage of the value of the contribution to share capital.
How should convertible loan agreements be formalized?
If the borrower is a limited liability company, the convertible loan agreement must be notarized.
If the borrower is a joint-stock company, the convertible loan agreement may be concluded in simple written form.
If the borrower is a joint-stock company, the convertible loan agreement may be concluded in simple written form.
What else should be considered when concluding convertible loan agreements?
- A claim for loan conversion may be submitted within 3 months of the due date and/or
the occurrence of other circumstances specified in the agreement unless a shorter period
is provided in the agreement. - Unanimous prior approval of the general meeting of shareholders or the borrower's shareholders will be required to conclude a convertible loan agreement, an agreement to amend the terms and conditions of the convertible loan agreement, as well as an assignment agreement.
- An agreement for assignment to another entity of the right to claim loan conversion from the borrower may be concluded only if such assignment is provided in the convertible loan agreement
Amendments to the law
Federal Law No. 354-FZ dated July 2, 2021 Amending Certain Legislative Acts of the Russian Federation was published on July 2, 2021
This law amends Fundamental Principles of Russian Legislation on Notarial Services No. 4462-I dated February 11, 1993, Federal Law No. 208-FZ dated December 26, 1995 On Joint-Stock Companies, Federal Law No. 14-FZ dated February 08, 1998 On Limited Liability Companies, Federal Law No. 39- FZ dated April 22, 1996 On Securities Market and Federal Law No. 129-FZ dated August 08, 2001 On State Registration of Legal Entities and Individual Entrepreneurs by providing for rules regulating legal relations related to the conclusion and performance of convertible loan agreements.
This law amends Fundamental Principles of Russian Legislation on Notarial Services No. 4462-I dated February 11, 1993, Federal Law No. 208-FZ dated December 26, 1995 On Joint-Stock Companies, Federal Law No. 14-FZ dated February 08, 1998 On Limited Liability Companies, Federal Law No. 39- FZ dated April 22, 1996 On Securities Market and Federal Law No. 129-FZ dated August 08, 2001 On State Registration of Legal Entities and Individual Entrepreneurs by providing for rules regulating legal relations related to the conclusion and performance of convertible loan agreements.
The law will become effective once signed by the President, usually within 10 days of its official publication.
We are pleased to offer our services for support of conclusion of convertible loan agreements.
We are pleased to offer our services for support of conclusion of convertible loan agreements.