Carveouts to Antidilution Protection

Cite this article as: Jason Mance Gordon, "Carveouts to Antidilution Protection," in The Business Professor, updated April 24, 2015, last accessed April 2, 2020, https://thebusinessprofessor.com/knowledge-base/carveouts-to-antidilution-protection/.

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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.

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