Convertible Loan Agreement: Definition & Sample

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What is a Convertible Loan Agreement?

A convertible loan agreement is a loan agreement that can be converted into a predetermined number of equity shares later. Sometimes a convertible loan agreement is known as a convertible bond. The agreement is known as hybrid security, it has components of a typical agreement, but specific terms also depend on the market's prices.

The repayment price of a convertible loan agreement is affected by the interest rate, stock price, and credit rating. Borrowers can benefit from entering into convertible loan agreements by receiving interest payments and an equity investment option.

Common Sections in Convertible Loan Agreements

Below is a list of common sections included in Convertible Loan Agreements. These sections are linked to the below sample agreement for you to explore.

Convertible Loan Agreement Sample

DATED 31 st July 2003

CONVERTIBLE LOAN AGREEMENT

ASPACE SOLUTIONS LIMITED

CONVERTIBLE LOAN AGREEMENT

IT IS AGREED AS FOLLOWS:

In this Agreement the following expressions have the following meanings, unless the context otherwise requires:

means, in the case of the Company, the latest annual statutory profit and loss account and statutory balance sheet of the Company available from time to time;

means the agreement to be entered into between Orla Macallister and Una Gilmore as the administrators of the estate of Paul Gilmore deceased, Alan Bates, Rick Peel, EFG Reads Trustees Limited, John Merchant, Corbett Keeling Limited, Gary Rimmer (1) and ActivCard (2) relating to a purchase of shares in the Company by the Lender;

means the United Kingdom Companies Act 1985 as amended from time to time;

means the Lender, and any holding company of the Lender and any subsidiaries of the Buyer and any such holding company as such terms are defined in Section 736 of the Companies Act 1985 (as amended), in each case, from time to time;

means the additional sum of £208,145.78 (two hundred and eight thousand one hundred and forty five Pounds Sterling and seventy eight pence);

means any or all of the following events, occurring at any time, or by reference to any date, when the Loan remains capable of conversion into Ordinary Shares:

means the advance of the Cash Loan made pursuant to clause 2.2 of this Agreement;

means the Company’s Articles of Association as in force on the date of this Agreement;

means in relation to any Company, a subsidiary or holding company of it, or a subsidiary of such holding company, where subsidiary and holding company have the meanings given in section 736 of the Act and “Associated Company” means any of them;

means all national and local governments, government departments, supranational bodies, local or public authorities, statutory undertakings, states or agencies;

means the board of Directors of the Company from time to time;

means the development, licensing and maintenance of software for the financial services industry;

means a day (other than a Saturday or Sunday or public holiday) on which banks are open for business in London or the United States of America;

means the sum of £2,500,000 (Two Million Five Hundred Thousand Pounds Sterling)

means the conditions set out in Clause 15

means the conversion of all or part of the Loan into Shares in accordance with this Agreement;

means the amount of the Loan to be converted into Shares pursuant to a Conversion Notice;

means each date during the Conversion Period, being a Business Day, specified by the Lender in a Conversion Notice as the date on which Conversion Rights (in whole or in part) are to be exercised;

means a conversion notice as referred to in Clause 6 to be given by the Lender, the form of which is set out in Schedule 1;

in the event that the Loan has not been fully repaid by the Final Repayment Date, the period commencing on the Final Repayment Date until the date of the full repayment of the Loan or Conversion of the final balance of the Loan (as the case may be);

means the £25 per Ordinary Share at which the Loan is to be converted into Ordinary Shares pursuant to Clause 6 hereof such price being subject to adjustment pursuant to Clause 7;

means the conversion rights of the Lender to convert the Loan into Shares under Clause 6;

means the fixed and floating charge dated the same date as this Agreement and granted by the Company in favour of the Lender in relation to this Agreement;

means any Event of Default or any Potential Event of Default;

means a rate equivalent to 5 per cent per annum over the Interest Rate;

means the disclosure bundle from the Managers to the Lender of even date herewith as referred to in the Investment Agreement

means the disclosure letter from the Managers to the Lender of even date herewith as referred to in the Investment Agreement;

means any distribution by the Company of its assets, profits, reserves or capital to any of, or any class of, its shareholders and any cancellation or purchase or reduction or repayment of share capital or reserves other than:

means this Agreement, the Investment Agreement, the Services Agreements, the Debenture, the Articles and the Acquisition Agreement and any other documents under such agreements and “Document” means any of them;

“Event of Default”

means any of those events set out in Clause 12 (Events of Default);

means either i) a listing of Shares on a recognized stock exchange ii) a sale of all or substantially all of the assets of the Company (other than as part of an inter group reorganisation) or iii) the sale of 50% or more of the Shares to a third party (other than as part of an inter group reorganisation) or to persons connected to such person (as defined by the City Code on Takeovers and Mergers);

means this Agreement, the Acquisition Agreement, the Investment Agreement, the Debenture, the Services Agreements and all documents now or hereafter entered into containing any guarantee of or security for any of the obligations of the Company under this Agreement or whereby any party has agreed that any indebtedness owed to such party by the Company be subordinated to the Company’s indebtedness to the Lender or to its creditors generally;

“Final Repayment Date”

means the second anniversary of the date of the Advance;

means the Company and its Subsidiaries from time to time and “Group Company” means any of them;

means any obligation of any person from time to time (present or future, actual or contingent, as principal or surety or otherwise) for the payment or repayment of money including, but not limited to:

“Intellectual Property Rights”

means patents, trademarks, service marks, registered designs, applications for any of those rights, trade and business names, unregistered trade marks and service marks, copyrights (Including source code and object of software programs), know-how, database rights, rights in designs and inventions and other rights of the same or similar effect or nature, in each case in any Relevant Jurisdiction;

means interest payable by the Company in connection with the Loan pursuant to Clause 3;

“Interest Payment Date”

means 14 days after each anniversary of this Agreement or the Final Repayment Date;

means the rate of 6 per cent per annum;

means the agreement dated the same date as this Agreement and made between the Company, Steve Keohane, Paul Ryder, Julian Lovelock and the Lender;

means the admission of the Ordinary Shares or any part of it to trading on any Recognised Investment Exchange or on any publicly recognised securities or investment exchange, market or over the counter market anywhere in the world;

means the aggregate principal amount owing to the Lender under this Agreement at any relevant time in respect of the Cash Loan and the Additional Indebtedness;

means Steve Keohane, Julian Lovelock and Paul Ryder;

“Notice of Conversion”

means the notice in the form of Schedule 1 hereto;

means the ordinary shares of 1 pence each in the capital of the Company;

“Potential Event of Default”

means any event or circumstance which in the reasonable opinion of the Lender is likely to result in an Event of Default;

“Recognised Investment Exchange”

has the meaning given to it in Section 285 of the Financial Services and Markets Act 2001;

means the number of Shares to be issued to the Lender under a Conversion Notice, being equal (subject to any adjustments under clause 6) to the Conversion Amount divided by the Conversion Price;

in respect of any person means the jurisdiction in which such person is incorporated or, if different, has its principal place of business;

means any date from this date hereof but not later than the Final Repayment Date or a Listing which ever is the earlier, save that, if such date is not a Business Day, the Repayment Date shall be the Business Day immediately preceding such date;

means any mortgage, charge, assignment, pledge, lien, right of set-off, hypothecation, encumbrance, priority or other security interest (whether fixed or

floating) including, without limitation, any “hold-back” or “flawed asset” arrangement together with any preferential right, retention of title, deferred purchase, leasing, sale or purchase, sale and leaseback arrangement, trust agreement, declaration of trust, trust arising by operation of law, any option or agreement for any of the same or any arrangement which has substantially the same commercial or substantive effect as the creation of security;

means the employment agreements between the Company and each of the Managers;

means shares of any class in the capital of the Company from time to time;

means the lawful currency for the time being of the United Kingdom and in respect of all payments to be made under this Agreement in Sterling means immediately available, freely transferable cleared funds;

bears the same meaning as that contained in Section 736 of the Act (Definition of “subsidiary”);

means all present and future taxes, levies, duties, charges, assessments, deductions or withholdings whatsoever, including any interest thereon, and any penalties and fines with respect thereto, wherever imposed, levied, collected or withheld pursuant to any regulation having the force of law and “Taxation” shall be construed accordingly;

means value added tax as provided for in VATA and legislation (whether delegated or not and, for the avoidance of doubt, including the Provisional Collection of Taxes Act 1968) supplemental thereto and any tax similar or equivalent to value added tax imposed by any country other than the United Kingdom and any similar or turnover Tax replacing or introduced in addition to any of the same; and

means the Value Added Tax Act 1983.

The Company shall be at liberty at any time to repay the whole or any part of the Loan without premium or penalty provided that:-

if a resolution shall be passed for the voluntary winding up of the Company during the Conversion Period, the Lender will be entitled, in respect of the Loan or any part thereof, on giving written notice to the Company within three months after the passing of such resolution, to elect to be treated as if it had exercised its conversion rights immediately before the commencement of such liquidation and, in that event, the Lender shall in lieu of the payments which would otherwise be due in respect of such Loan, be entitled to receive out of the assets available in the liquidation, pari passu with the holders of the Ordinary Shares, such a sum as it would have received had it been the holder of Ordinary Shares to which it would have been entitled by virtue of such a conversion and had ceased to hold such Loan on the last Interest

Payment Date preceding the commencement of the liquidation without any adjustment for interest actually received or entitlement to dividends actually paid after the date of commencement of the liquidation. For the purposes of this paragraph of this condition the Conversion Price applicable shall be that applicable immediately following the date of such resolution if conversion had been effected on that date at the election of the Lender under condition 7.1. Subject to this paragraph, all conversion rights lapse in the event of liquidation.

If on or prior to a Conversion Date an Adjustment Event occurs, the Conversion Price shall be adjusted immediately in such manner as the Lender and the Company shall agree to be appropriate with a view to ensuring that the Lender would, immediately following such Adjustment Event and/or the exercise of any rights granted to a person pursuant to that Adjustment Event, be entitled on exercise of the Conversion Rights, to the same proportion of the Ordinary Shares as it would have had had it exercised in full such Conversion Rights immediately prior to the Adjustment Event. In the event of any disagreement between the Company and the Lender as to the Conversion Price after the occurrence of an Adjustment Event, the matter shall be referred to the auditors of the Company or in the Lender’s sole discretion such firm of independent auditors as is selected by the Lender. The auditors of the Company or the firm of independent auditors selected by the Lender shall act as experts and not as arbitrators and their decision shall in the absence of manifest error be final and binding on the parties. The fees and expenses of the auditors of the Company or of the firm of independent auditors selected by the Lender shall be borne by the Company save that the

Lender shall pay the said fees and expenses in the event that the relevant auditors confirm the calculation of the said Conversion Price proposed by the Company.