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.