Legal Definitions - antidestruction clause

An antidestruction clause is a contractual provision designed to safeguard the conversion rights of investors in a company, particularly when that company undergoes a significant corporate event like a merger or acquisition.

It ensures that if an investor holds a security (such as a convertible bond or convertible preferred stock) that can be exchanged for common stock, their ability to make that exchange is not lost or diminished if the company's original common stock is replaced by new shares from a merged or acquiring entity. Instead, the clause allows the investor to convert their original security into the equivalent new shares of the combined or acquiring company, preserving the value and intent of their initial investment.

• Example 1: Startup Acquisition with Convertible Preferred Stock

  Imagine "InnovateTech," a promising startup, has issued convertible preferred stock to its early investors. This stock gives them the option to convert their preferred shares into a certain number of InnovateTech's common shares at a later date. A larger technology firm, "Global Dynamics," decides to acquire InnovateTech, and as part of the deal, InnovateTech's existing common stock will be exchanged for Global Dynamics' shares.

  The antidestruction clause in InnovateTech's convertible preferred stock agreement ensures that the early investors do not lose their conversion rights. Instead of converting into InnovateTech's now-defunct common stock, they gain the right to convert their preferred shares into Global Dynamics' common stock, maintaining the potential upside of their original investment in the new, larger company.

• Example 2: Corporate Merger Involving Convertible Bonds

  Consider "Apex Manufacturing Inc.," a publicly traded company that has issued convertible bonds to raise capital. These bonds allow bondholders to convert their debt into a specified number of Apex Manufacturing's common shares. Apex Manufacturing Inc. later announces a merger with "Synergy Corp.," where Apex will be absorbed, and its shareholders will receive Synergy Corp. shares in exchange for their Apex shares.

  The antidestruction clause in the convertible bond agreement prevents bondholders from losing their conversion option due to the merger. After the transaction, they can convert their bonds into Synergy Corp.'s common shares, reflecting the new corporate structure and ensuring their investment's terms are honored despite the change in company identity.

• Example 3: Private Equity Investment with Convertible Notes

  A private equity firm invests in "BioGen Innovations," a biotech startup, through convertible notes. These notes are essentially loans that can be converted into BioGen Innovations' common stock under specific conditions, such as a future funding round or an acquisition. Before the notes are converted, a major pharmaceutical company, "PharmaGiant," acquires BioGen Innovations, purchasing all its outstanding common stock and replacing it with PharmaGiant shares.

  The antidestruction clause in the convertible note agreement guarantees that the private equity firm's conversion rights are preserved. Instead of converting into BioGen Innovations' now-acquired common stock, they gain the right to convert their notes into PharmaGiant's common stock, ensuring their investment's original intent and potential for equity ownership are carried forward into the acquiring company.