corporate law

Convertible bonds



A convertible bond offers bondholders the possibility to convert their bond into shares (according to a predefined conversion rate, for example one bond for one share).

Since convertible bonds allow bondholders to obtain company shares, the issuance of convertible bonds must follow the same rules for issuing a bond and increasing capital. This causes consequences including : 

  • Issuing a convertible bond must be carried out at the general shareholders meeting in the presence of a notary (whereas the issuance of a non-convertible bond can be done by the company's Board of Directors).
  • Existing shareholders have preference in the issuance of convertible bonds before they are offered to third parties, preventing existing shareholders from becoming diluted and enabling them to maintain their percentage of investment in the company in the event that the bonds are converted into shares.
  • An independent auditor is required to certify that the loans transformed into shares constitute a debt which is certain, liquid and payable where the amount is at least equivalent to the shares issued in exchange.

Luxembourg doctrine is divided on this last point, regarding the need of an independent auditor to intervene in the issuance of a bond. Some argue that an auditor is unnecessary because an auditor is required to release a report on increases in capital, whereas in this case an increase in capital has not yet occurred and may never take place. Others (and we count ourselves to be of this opinion) believe that if an independent auditor is not contracted it goes against :

  • the letter of the law in article 32-4 on the law of corporations;
  • And the spirit of this law, which requires that all capital invested is closely controlled, especially to insure third parties against the company's default.

Artilce 32-4 LSC: “Articles 32, 32-1 and 32-3 are applicable to the issuance of convertible bonds or matching a subscription right, but not to the conversion of a security and to the exercise of a subscription right which applice to article 32-2.”