Convertible bonds are a form of financing in which a company raises debt capital and grants the holder of the bond the right or obligation to convert the bond into an investment in the company at a later date. This instrument can also be used for limited liability companies (GmbH) – taking into account the special features of company law.
The convertible bond is a way of raising long-term capital without having to rely on traditional bank financing. This enables flexible and comparatively uncomplicated financing, particularly in the growth phase or to finance new strategies.
On the investor side, the convertible bond offers an interesting combination of debt and equity elements: On the one hand, there is an entitlement to interest and – in the event of non-conversion – to repayment of the capital invested. On the other hand, conversion opens up the opportunity to participate in future increases in the value of the company.
The conversion of the bond into shares can be structured in the convertible bond conditions either as a conversion right or as a conversion obligation. In the case of a conversion right, the investor alone decides whether the capital invested is to be converted into shares. In the case of a conversion obligation, the company can demand the conversion of the capital invested into shares.
Irrespective of whether the capital employed is converted into shares on the basis of a conversion right or a conversion obligation, shares must be issued to the investor. These are usually created as part of a capital increase. In the case of a public limited company, so-called conditional capital can be created for this purpose. Conditional capital has the advantage that the new shares are created automatically with the conversion. The legislator has not provided for such conditional capital for the GmbH. For this reason, new shares in a GmbH can only be issued from a capital increase resolved by the shareholders’ meeting or from authorized capital. Authorized capital is created by the shareholders’ meeting and authorizes the managing directors to issue new shares for a maximum of five years.
As part of each capital increase, the investor must make a contribution to the new shares. The conversion results in the investor’s entitlement to loan repayment expiring. The investor’s contribution to the new shares is therefore basically the loan repayment claim. This constitutes a contribution in kind to the new shares with the consequence that the court must examine whether the value of the contribution in kind (i.e. the loan repayment claim) covers the issue amount of the new shares (so-called recoverability test). In order to avoid an impairment test, it is advisable to increase the capital against cash contributions at nominal value. This means that the investor still has to make a small cash contribution, namely the nominal value of the shares. The loan repayment claim then represents the premium. The advantage of this procedure is that there is no need for the court to check the value of the shares. This significantly simplifies and legally secures the implementation of the transaction.
A further challenge lies in the fact that the shareholders of a GmbH also have a subscription right to the new shares with every capital increase. The new shares can therefore only be issued to the investors if the shareholders waive their subscription rights or do not exercise them. In order to provide security at this point that the company can actually issue the new shares to the investors upon conversion, it is advisable to adopt authorized capital at the shareholders’ meeting in which the subscription rights of the shareholders are excluded. This presupposes that all shareholders are in agreement. This is because this exclusion of subscription rights will generally not be justified, with the result that the resolution of the shareholders’ meeting could be challenged in court.
In the case of a GmbH, the issue of convertible bonds and the resulting conversion right of the investors can therefore be presented in a simple and legally secure manner if the shareholders’ meeting, together with the authorization of the management to issue convertible bonds, creates authorized capital from which the new shares can be issued to the investors of the convertible bond in return for cash contributions in the event of conversion, excluding the subscription rights of the shareholders.
SOLEOS supports companies and investors in the legal structuring and implementation of convertible bonds in the limited liability company context – from the drafting of contracts to their implementation under company law.
