Why should a majority of investors be able to amend the convertible notes?

May 11, 2007

In the event a company needs to amend or waive a provision in the notes, absent a provision that says that the note can be amended or waived with the consent of holders of a majority in interest of the notes, the company has to get every single investor to agree to the amendment or waiver. This ends up being difficult as a practical matter if certain investors are unavailable or refuse to sign an amendment or waiver. Typical situations where a company may want to amend or waive a provision of the note might include extension of the maturity date, changing the terms of the automatic conversion on a qualified equity financing, etc. Majority is measured by the principal amount of the notes. The majority trigger may be set higher to two-thirds or seventy-five percent depending on the situation.

Comments

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  • Terry

    From the perspective of a noteholder holding a minority amount of the total principal balance of all notes, wouldn't that investor take serious issue with the possibility of his or her note being amended in a very unfavorable way? Is the amendment provision typically drafted to require that all notes be similary amended to prevent amendement of only the investor's particular note by a majority of unrelated noteholders?

  • http://www.startupcompanylawyer.com Yokum

    @Terry – Most investors would assume that a majority (or super-majority) would not implement an amendment that was adverse to everyone's interests. A careful person would spell out that any amendments must affect all investors equally.

  • http://www.startupcompanylawyer.com Yokum

    @Terry – Most investors would assume that a majority (or super-majority) would not implement an amendment that was adverse to everyone's interests. A careful person would spell out that any amendments must affect all investors equally.

  • http://www.startupcompanylawyer.com Yokum

    @Terry – Most investors would assume that a majority (or super-majority) would not implement an amendment that was adverse to everyone's interests. A careful person would spell out that any amendments must affect all investors equally.