Antidilution Clause: A provision in a contract or agreement that protects the ownership percentage of existing shareholders by allowing them to purchase additional shares at a lower price in the event of a new issuance of shares, thereby preventing dilution of their ownership stake. This clause is commonly found in investment agreements and shareholder agreements to protect the interests of existing shareholders.
An antidilution clause is a provision commonly found in contracts, particularly in shareholder agreements or investment agreements, that aims to protect the value of a party’s ownership interest in a company. The clause typically prevents the dilution of the ownership percentage or value of shares held by an investor or shareholder in the event of future issuances of additional shares by the company.
The purpose of an antidilution clause is to ensure that existing shareholders or investors are not unfairly disadvantaged by subsequent equity issuances that may reduce their ownership stake or the value of their shares. It provides protection against dilution by granting the affected party certain rights or remedies, such as the right to purchase additional shares at a discounted price or the adjustment of the conversion ratio for convertible securities.
The specific terms and conditions of an antidilution clause can vary depending on the agreement and the parties involved. Common types of antidilution provisions include full ratchet, weighted average, and broad-based weighted average formulas, which determine the adjustment to be made to the conversion price or the number of shares held by the affected party.
Antidilution clauses are important for investors and shareholders as they help maintain the economic value of their investment and protect against potential losses resulting from future equity issuances. However, it is crucial for parties to carefully negotiate and draft the terms of the antidilution clause to ensure it aligns with their specific interests and objectives. Consulting with legal professionals experienced in corporate law is advisable to ensure the clause is properly tailored to the particular circumstances and legal requirements.
Q: What is an antidilution clause?
A: An antidilution clause is a provision in a contract or agreement that protects the value of an investor’s ownership stake in a company from being diluted in the event of future equity issuances.
Q: How does an antidilution clause work?
A: An antidilution clause typically adjusts the investor’s ownership percentage or the conversion price of their securities in order to maintain their proportionate ownership in the company. This adjustment is triggered when the company issues additional shares at a price lower than the investor’s original investment.
Q: Why is an antidilution clause important?
A: An antidilution clause is important for investors as it safeguards their ownership percentage and prevents their investment from being significantly diluted if the company issues new shares at a lower price. It helps maintain the investor’s economic interest and protects against potential losses.
Q: What types of antidilution clauses are commonly used?
A: The two main types of antidilution clauses are full ratchet and weighted average. Full ratchet provides the investor with the lowest possible conversion price, while weighted average takes into account the new issuance price and the number of shares outstanding to determine the adjusted conversion price.
Q: What triggers the antidilution clause?
A: The antidilution clause is typically triggered when the company issues new shares at a price lower than the investor’s original investment price. This can occur during subsequent funding rounds, stock splits, or down-round financings.
Q: Can an antidilution clause be negotiated?
A: Yes, an antidilution clause can be negotiated between the investor and the company. The specific terms, such as the type of antidilution provision and the extent of adjustment, can be subject to negotiation based on the parties’ interests and bargaining power.
Q: Are there any limitations to antidilution clauses?
A: Antidilution clauses may have certain limitations, such as a cap on the adjustment or a minimum price threshold below which no adjustment is made. These limitations are often negotiated to strike a balance between protecting the investor and allowing the company to raise additional capital at a reasonable valuation.
Q: Are there any risks associated with antidilution clauses?
A: While antidilution clauses protect investors from dilution, they can potentially create conflicts between existing shareholders and new investors. The adjustment of conversion prices may impact the economic interests of other shareholders, which could lead to disputes or challenges.
Q: Can an antidilution clause
DismissThis site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 11th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/antidilution-clause/
- Modern Language Association (MLA):Antidilution Clause. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/antidilution-clause/.
- Chicago Manual of Style (CMS):Antidilution Clause. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/antidilution-clause/ (accessed: May 09 2024).
- American Psychological Association (APA):Antidilution Clause. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/antidilution-clause/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts