A conversion warrant agreement is a contract which entitles the holders of share warrants to convert their warrants into shares. Share warrants are transferable as well as convertible. If the warrant holder feels that warrant conversion is not helpful to him/her, he/she can transfer the warrants to another party. A conversion warrant agreement lists out the ways in which warrant conversion can be done, the pricing and the rights and obligations of the warrant holder.
What Is a Conversion Warrant Agreement?
Share warrants are documents issued by a company declaring that an individual is entitled to certain shares or stocks specified therein. It is a negotiable instrument and may be transferred by mere delivery without any prior registration of the aforesaid transfer. It is similar to an option, giving the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time.
A conversion warrant agreement is a contract between two parties for warrant conversion. The agreement is set for the conversion of warrants to other forms on the behest or request of the parties involved. This is also called a warrant exercise agreement. The investor may decide to exercise the right or decide to sell off these shares with the help of a hired professional i.e. a broker.
Purpose of Conversion Warrant Agreement?
Whilst some warrants can be exercised at any date, most have one or more exercise dates which are the only dates on which you can exercise your warrants. These are usually fixed dates of the year. Warrants usually have a final exercise date which is the last date you can exercise the warrants on. After this date the warrants are canceled, however, if you fail to exercise them you may still receive a cash payment if the warrants have a value on the final exercise date.
The simple purpose of conversion warrant agreement is to establish the ground rules on which such transfers must take place. They lay down the cost of doing so and the conversion rate followed. It makes the transfer more simple and efficient.
Inclusions in the Conversion Warrant Agreement?
Apart from the particular commercial terms which are specific to this agreement, standard boilerplate clauses also need to be included in this contract. The names of parties, their registered addresses, effective date, recitals, representations, and warranties, etc, are some other inclusions.
Key Terms of Conversion Warrant Agreement?
- Number of Shares: The warrants are offered for a certain number of shares which the investor will be entitled to, on or before the expiry date.
- Strike Price: The pre-determined price at which the warrants are to be exercised is known as the strike price.
- Expiry Date: The date on or before which the stock warrant needs to be exercised. In other words, this is its expiry date.
- Conversion Ratio: The ratio of converting the warrants into underlying shares is called a conversion ratio. This needs to be calculated properly.
- Intrinsic value: The difference between the price of the underlying stock and the exercise or strike price. The intrinsic value can be zero, but it can never be negative
- Time value: Difference between the price of the call or warrant and its intrinsic value.
How to Draft the Conversion Warrant Agreement?
When a company needs to increase its share capital by conversion of warrants or convertible loan, such a contract is entered into. The following guidelines should be followed for warrant conversion:
- Number of warrants allotted and their nature: A conversion warrant contract should contain the number of warrants being allotted and the nature of shares into which they can be converted.
- Conversion price: Price at which conversion occurs should be pre-determined and fixed according to applicable law. This may be subject to negotiation as well.
- Number of shares: Warrants would be typically given against a certain number of shares. Such a number should be mentioned clearly.
- Entitling Events: Events entitling the warrant holder to convert such warrants should also be mentioned.
- Timeline for conversion: Timeline within which such warrants need to be converted should be mentioned.
Advantages of a Conversion Warrant Agreement?
Companies often include warrants as part of share offerings to entice investors into buying the new security. A warrant can also increase a shareholder’s confidence, provided the underlying value of the security increases over time. Investors tend to favor warrants because they increase the participation of the investor in the business, and also, exercising their right provides them with a position in the working of the business.
Companies tend to include warrants as they can bring down the cost of financing and provide assurance for additional capital. This also attracts investors as they are most likely to opt for a slightly lower interest rate on a bond financing if a warrant is attached, as compared with a straightforward bond financing. The performance of a warrant can be tracked by observing the movement of the underlying securities.
Stock warrants are beneficial to both, the issuing company and the investors. They may provide an additional financial push to companies that will incentivize the investors with high profit yielding investment option, for investors who look for medium to long term benefits. The return on the warrants is quite high since these are generally done with the medium or long-term investing perspective and the companies usually earn high profits in the long term, making the warrants profitable. The warrants allow the investor to purchase the shares or securities on a future date, enabling the holder to gather the required sum over the period rather than taking credit or blocking the funds immediately.
These agreements of conversion, therefore become relevant for protecting the interest of both the parties involved. A breach of the same can be cured by resorting to legal or contractual remedies. The latter would be the one listed in the contract.
[Also Read: Conversion of Debenture Agreement]
Sample for Conversion Warrant Agreement
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