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Simple English definitions for legal terms
antidilution provision
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A quick definition of antidilution provision:
An antidilution provision is a rule that protects the value of a convertible security when a company takes actions that could reduce its value. This provision ensures that the conversion ratio, which determines how many shares the security can be converted into, remains fair and unchanged despite any share splits or dividends. Essentially, it prevents the investor from losing out on the value of their investment due to actions taken by the company.
A more thorough explanation:
An antidilution provision is a clause in a convertible security that protects the investor's conversion privilege from being affected by certain corporate actions that could dilute the value of their investment. This provision is designed to ensure that the investor's ownership percentage remains the same even if the company issues more shares or undergoes a stock split or dividend.
Suppose an investor holds a convertible bond that can be converted into 100 shares of a company's stock. The conversion ratio is 1:1, meaning that each bond can be exchanged for one share of stock. However, if the company issues more shares or undergoes a stock split, the conversion ratio could change, diluting the value of the investor's shares. To protect against this, the bond may include an antidilution provision that adjusts the conversion ratio to maintain the investor's ownership percentage.
For example, if the company issues 100 new shares, the conversion ratio may be adjusted to 1:1.1, meaning that the investor would receive 110 shares instead of 100. This ensures that the investor's ownership percentage remains the same, even though the total number of shares has increased.
Another example of an antidilution provision is a "full ratchet" provision, which adjusts the conversion ratio to the lowest price at which new shares are issued. This protects the investor from any decrease in the value of their investment due to the issuance of new shares at a lower price.