Convertible loan as an instrument for attracting financing

The draft Federal Law “On entering amendments into certain legislative acts of the Russian Federation” was introduced to the State Duma.

The draft law establishes the procedure for converting debt capital into equity by means of a convertible loan agreement and provides a mechanism for enforcing it, granting additional protection to creditors in form of a right to receive shares in the charter capital in the course of entering into a financing agreement. The draft law applies to limited liability companies and non-public joint stock companies.

The potential possibility to set off claims in exchange for shares in the borrower’s charter capital existed in the laws earlier; however, was not extensively used in practice, partly due to limitation of the period of a company could own its shares and absence of guarantee that the shares will be issued to the creditor’s benefit. For this reason, in practice such transactions were rare in the Russian Federation, and entities structured them outside the Russian Federation.

The most substantial provisions of the draft law are:

• Extension to three years of the timeframes for placing shares, making additional contributions, as well as the ownership period for shares acquired by the company as treasury shares;
• Fixing the possibility to convert a loan into shares in the charter capital regardless of loan maturity, including for limited liability companies;
• Mandatory unanimous approval of the convertible loan agreement by the general meeting of shareholders;
• Increase of the number of own shares which a company can acquire from shareholders for selling them to a lender, to 25% of the company’s charter capital;
• Establishing possibility of forced registration of shares issuance and amendments into the company’s charter in respect to the amount of charter capital based on a court decision.

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