What is a Shareholders’ Resolution to Issue Convertible Notes?
A Shareholders’ Resolution to Issue Convertible Notes is a resolution to be passed by the shareholders of a company to approve the issue of convertible notes. Generally, if a company wishes to create and issue convertible notes, the shareholders of the company must pass a resolution to give the board of directors the authority to execute the Convertible Note Term Sheet and the Convertible Note Instrument, and the authority to issue the convertible notes to investors.
How to implement Shareholder’s Resolution to Issue Convertible Notes?
There are two options when using a Shareholders’ Resolution to Issue Convertible Notes:
- if a general meeting (i.e., a meeting of shareholders) is convened to address the issue, use the Minutes of a General Meeting to Issue Convertible Notes should be signed by the chairperson of the meeting.
- if the company has only one shareholder or the shareholders choose to pass the resolution by way of a written resolution, use the Written Resolution to Issue Convertible Notes.
What is a Convertible Note?
A Convertible Note is a form of debt or investment. Basically, it is a short-term loan typically used in a startup environment. A Convertible Note is used by businesses to raise money. They can do so either through Convertible Notes or Equity. Essentially a Convertible Note is a loan that turns into ownership in the company. Some features of Convertible Notes are: Interest Rate: As an entrepreneur borrows some money from the investor, so he/she will have to pay interest on that money in the form of equity. Discount: after the convertible notes are converted into equity the investor will normally get a discount of 20-30% while buying the new equity.
What are the elements of a Shareholder’s Resolution to Issue Convertible Notes?
These are the main elements that are documented in a shareholder’s resolution to issue convertible notes. I.e.; Details of the meeting: This includes the basic agenda of the meeting that needs discussion before passing the resolution. Date of passing the resolution: The date on which the resolution to issue convertible notes has been passed should be properly documented in order to keep it as proof for future need. Details of the investors: The name and address of the investor should be clearly written along with other financial details like how much does an investor is ready to invest in a business etc. The principal amount of the subscription: This is the amount of the note that will be issued. Company proposal to execute a convertible note instrument: The company must provide details on how the note will be provisioned and the terms of the instrument.
What right do all common shareholders have over a company?
The main rights that all common shareholders have over a company are: Voting Rights: Every shareholder has a voting right to elect the directors in the company annual meeting. If they are not able to vote physically, they can do so by using a proxy and mail in their vote. Ownership in a portion of the company: Every shareholder has some amount of ownership in the company. However, the influence of shareholders over a company entirely depends upon the number of shares he/she acquires. They also have a claim on the portion of assets owned by the company. Right to dividends: Dividends can be defined as the sum of money paid to shareholders by the company out of its profits. So, whenever the company makes some profit all the shareholders have the right to get the dividends out of that profit. Right to transfer ownership: All the common shareholders have the right to sell their shares to another person according to their needs. When they sell their shares, automatically the ownership gets transferred to another person. Right to information: Shareholders are also entitled to the right to information such as examining basic documents like company bylaws and minutes done by board meetings.
Key terms of a Convertible Note
- Definition Clause: Here one needs to include all the terms which have been used in the Convertible Notes Agreement.
- Investment Clause: Details of the investment amount such as XXX shall be transferred to XYZ Company’s Account along with the conditions and dates.
- Valuation cap clause for the investment: What is the value of a present investment in the future? Mention the valuation of investment in terms of equity shares.
- Terms of CN: These can include the general terms and conditions which are applicable in the CN.
- Redemption/Liquidation Clause: This has to be included if investors wish to redeem their Convertible Note.
- Termination: The termination clause should mention details of what will happen if there is any breach of representation and warranties or covenants.
- Confidentiality: This is to ensure that all involved parties treat confidential information with care and respect to the business of the company.
Conclusion
Convertible notes are a common component of every company’s lifecycle. When used correctly, they can offer both the business and seed investors leverage in pursuing major fundraising benefits. A Shareholders resolution to issue convertible notes can help companies to attract new investors and grow to their full potential.
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