01 June 2017, 01:09 / Economics Exclusively by subscription

Investment transactions can be simplified

Deputies propose allowing investors to convert loans into shares at any time Elizaveta Bazanova A convertible loan is an inexpensive instrument that can increase investor remuneration / Evgeniy Razumny / Vedomosti

To do this, it will be enough for them to enter such a condition into the agreement, approved unanimously by the shareholders; amendments to the law on joint stock companies were introduced to the State Duma by the chairman of the property committee Nikolai Nikolaev and deputy Dmitry Sazonov.

Investors who have invested in the development of the company can now convert a loan into shares. But in practice it is very difficult. There are no guarantees that the company will place shares in exchange for debt, explains Denis Spirin from Prosperity Capital: a separate decision of shareholders is needed after the loan is issued. It is possible to bypass the restriction, but it is too risky. For example, an investor can give a loan to a company and at the same time enter into an option agreement with a shareholder, under which, under certain conditions, he can require the shareholder to sell shares, explains NSP senior lawyer Ekaterina Znamenskaya, but to do this, the company’s debt must be transferred to the shareholder. If the shareholder receives the loan himself, he can “spend the money” on the project company, but both options are not always justifiably risky, she says. And companies enter into transactions under foreign law, where such instruments exist, says Heads Consulting lawyer Kristina Shalomeeva.

If the amendments are adopted, the parties will be able to agree on the terms of conversion before receiving the loan. They will be able to agree on everything, including the additional issue, in the agreement, explains Saveliev, Batanov & Partners partner Anastasia Savelyeva, and the court, at the request of the creditor, will register such an issue. This will make life easier for venture capital companies that attract investors at the initial stage, says Spirin. They are not always ready to enter the authorized capital, but if the project is successful, they will be able to get a share, Savelyeva agrees.

Beneficial right

It will be more profitable to structure transactions under Russian law, the explanatory note says: the company will be able to receive money from the investor faster, and he will be able to minimize risks.

This may also be interesting for companies with project financing, when the company structures several levels of debt and the subordinated debt receives priority or the right of conversion, says Dmitry Stepanov, partner at Egorov, Puginsky, Afanasiev and Partners: usually this condition is stipulated if the creditors fully they don’t know how the project will develop. Banks will also be interested, especially if the debtor risks becoming bankrupt, he believes. In companies that have not included a conversion clause in the contract, it will not be applied, the amendments say.

A convertible loan is a low-cost instrument that can increase investor compensation and increase the availability of venture capital, the explanatory note says. It can also become another guarantee of investment, supports the President of the Association of Corporate Lawyers, Alexander Nesterenko.

The conversion procedure needs to be finalized; it does not yet take into account the interests of the participants who joined the company after such a transaction and did not participate in the decision-making, warns Nesterenko. It is not clear how they can even find out about such agreements before purchasing company shares, Spirin agrees; even the rules on related-party transactions do not apply for such transactions. It is necessary to ensure that the mechanism works as long as the composition of the society's participants remains unchanged, or to establish rules for informing new participants, he suggests.