What is an Antidilution Provision?

The anti-dilution clause is also called anti-dilution agreement. It is commonly used in the private equity investment field and is a clause in the preferred stock agreement. It means that during the follow-up project financing or targeted issuance of the target company, private equity investors avoid the depreciation of their own shares And measures taken to over-dilute the share.

Anti-dilution clause

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Anti-dilution clause

Anti-dilution clauses are broadly divided into prevention

1.Ability to motivate

1. Conversion rights

Holders of preferred shares can convert their shares into ordinary shares at any time. The initial conversion ratio is 1: 1. This ratio is stipulated in the occurrence of share dividends, share splits, share mergers and similar events, as well as "anti-dilution clauses". Adjust accordingly.

2.Preferences

When the company issues equity securities (except for the issuance of "option pool" shares and other customary circumstances), the holders of the preference shares purchase a corresponding number of shares in accordance with their share ratio (fully diluted).

3. Anti-dilution clauses for price reduction financing

After the completion of this capital increase, before the company is listed, the company may not issue new equity securities, including but not limited to ordinary shares, preferred shares, convertible bonds, etc., with conditions lower than the conditions of the capital increase, unless the investor obtains written consent ; Even if the investor agrees to issue such new equity securities, the investor has the right of pre-emption under the same conditions to maintain its shareholding ratio before the new round of capital increase or issuance. After the completion of the capital increase, before the company is listed, if the price of the new registered capital or newly issued equity is lower than the price of the investor's current capital increase, the investor's capital increase price must be based on the amortized weighted average method. Adjustment (weighted average method is defined as: the total amount of the capital increase of the investor this time and the company's subsequent capital increase divided by the sum of the registered capital and the newly registered capital of the investor to obtain the average capital increase price) The adjustment method can be performed by the actual controller to compensate the investor for the corresponding price difference, or by the actual controller to transfer part of the equity to the investor for free; after completing the capital increase, before the company is listed, the investor The shareholding ratio of the company held should be adjusted proportionately in the case of the company's stock split, stock dividends, mergers, or new shares issued at a price lower than the capital increase, and other asset reorganizations to ensure that the investor's shareholding ratio is not lost.

In addition, the anti-dilution protection during price reduction financing can also adopt a completely ratcheting method, that is, the investor directly applies the new low investment price for conversion.