1. Home
  2. Legal
  3. Carveouts to Antidilution Protection
  1. Home
  2. Finance
  3. Carveouts to Antidilution Protection
  1. Home
  2. All Topics
  3. Carveouts to Antidilution Protection

Carveouts to Antidilution Protection

Carveouts to Anti-Dilution

Triggering anti-dilution protection can be detrimental to common shareholders, who are subject to dilution. As such, the common shareholder may attempt to negotiate barriers to triggering an anti-dilution provision (i.e., a change in the anti-dilution conversion ratio).  Below are common carveouts to corporate actions that that will not trigger anti-dilution provisions:

  • Converted Shares – Preferred shareholders converting their shares to common shares,
  • Exercise of Options – Issuance of common shares pursuant to exercise of options, warrants, or other convertible securities,
  • Stock Dividends – Issuance of common shares as a dividend to preferred shareholders,
  • Division of Shares – Increased number of shares pursuant to a stock split,
  • Employee Compensation – Common s `hares (or share equivalents) issued to individuals (such as employees or contractors) pursuant to a compensation or vesting schedule,
  • Re-stated Certificate – Issuances make pursuant to an authorized amendment to articles of incorporation, such as a stock split or authorization of another class of shares,
  • IPO – Shares issued pursuant to an IPO,
  • Merger or Acquisition – Any shares issued pursuant to M&A or board-approved joint venture,
  • Commercial Transactions – Shares issued as part of a board approved debt financing, commercial transaction, real property transactions,
  • Settlements – Shares issued pursuant to any board-approved settlement,
  • Board Approved Relations – Shares issued pursuant to board-approved strategic or  operational aspects, such as R&D, technology license, or partnerships,
  • Shares to Suppliers – Shares issued to suppliers as part of a board approved transaction,
  • Majority Vote – Shares issued pursuant to approval of a majority of preferred shareholders.

The amount or number of common shares issued that will not trigger anti-dilution is typically limited to a specific number, board approval (majority or unanimous), or approval of a majority of preferred shareholders. Also, an amendment to the articles of incorporation pursuant to the bylaws can be used to avoid a trigger.

Was this article helpful?

Related Articles

Add A Comment