Convertible Loan Stock Agreement Template for England and Wales

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Key Requirements PROMPT example:

Convertible Loan Stock Agreement

"I need a Convertible Loan Stock Agreement for a Series A investment of £2 million into my fintech startup, with conversion rights triggered at a £10 million valuation and an interest rate of 8% per annum."

Document background
A Convertible Loan Stock Agreement is typically used when companies seek to raise capital while deferring immediate equity dilution. This document, governed by English and Welsh law, provides a framework for issuing debt securities that can later convert into equity shares, usually at a predetermined price or at a discount to a future funding round. The agreement includes detailed provisions on conversion triggers, interest rates, redemption rights, and security (if applicable). It's particularly popular among growth-stage companies and start-ups where current valuation might be challenging to determine.
Suggested Sections

1. Parties: Identification of the company and loan stockholders

2. Background: Context of the convertible loan stock issuance

3. Definitions: Key terms used throughout the agreement

4. Issue of Loan Stock: Terms of issuance including amount and denomination

5. Interest: Interest rate, calculation method, and payment terms

6. Conversion Rights: Terms and mechanisms for converting loan stock to shares

7. Redemption: Terms for redemption of the loan stock

8. Warranties and Representations: Standard warranties given by the company and stockholders

9. Covenants: Ongoing obligations of the company

10. Notices: Process for serving notices under the agreement

11. Governing Law and Jurisdiction: Specification of English and Welsh law as governing law

Optional Sections

1. Security: Details of any security provided, used when loan stock is secured

2. Transferability Restrictions: Restrictions on transfer of loan stock, if applicable

3. Events of Default: Circumstances constituting default and consequences

4. Tag Along Rights: Rights of stockholders to participate in sale of company shares

5. Drag Along Rights: Rights to force minority stockholders to join in sale of company

Suggested Schedules

1. Form of Certificate: Template for the loan stock certificate

2. Conversion Notice: Form of notice for exercising conversion rights

3. Terms and Conditions: Detailed terms applying to the loan stock

4. Conversion Calculations: Formulae and examples of conversion calculations

5. Deed of Adherence: Form of deed for new stockholders to adhere to the agreement

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Relevant legal definitions
Clauses
Relevant Industries
Relevant Teams
Relevant Roles
Industries

Companies Act 2006: Primary legislation governing company operations, share capital, class rights, and company securities in England and Wales

Financial Services and Markets Act 2000: Regulates financial services industry and markets, including the issuance and trading of securities

Consumer Credit Act 1974: Regulates credit arrangements and may be applicable if the convertible loan stock involves consumer investors

Prospectus Regulation Rules: Governs the requirements for preparing, approving, and distributing prospectuses for securities offerings

Financial Promotion Order 2005: Regulates how financial products, including convertible securities, can be marketed and promoted

Companies (Share Capital and Debentures) Regulations 2008: Specific regulations regarding company share capital and debenture issuance

Income Tax Act 2007: Tax legislation relevant to interest payments and conversion of loan stock to shares

Corporation Tax Act 2009: Corporate tax implications for companies issuing convertible loan stock

Taxation of Chargeable Gains Act 1992: Tax treatment of gains or losses from conversion of loan stock to shares

FCA Regulations: Financial Conduct Authority rules governing financial instruments and regulated activities

Market Abuse Regulation: Prevents market manipulation and insider trading in relation to financial instruments

Common Law Contract Principles: Fundamental contract law principles from case law affecting agreement validity and interpretation

Insolvency Act 1986: Governs creditor rights and company insolvency procedures affecting loan stock holders

Corporate Governance Code: Best practice guidelines for company management and shareholder relations

Money Laundering Regulations 2017: Requirements for due diligence and anti-money laundering procedures in financial transactions

Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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