Dilution Protection

Dilution protection

Standard provision that changes the conversion ratio in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder's potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value.

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Dilution Protection

In common and preferred stock, the right of a shareholder to maintain the same percentage of ownership in a company if the company issues more stock. This protects the investor from devaluation of his/her shares if the company decides to hold a round of financing. In preferred stock, dilution protection also indicates the right of a shareholder to purchase more shares in a new round of financing at the offering price up to his/her previous percentage of ownership. Also, in convertible bonds, dilution protection mandates a change to the conversion ratio if it is necessary to achieve the same amount of equity in case the bonds are converted. Most U.S. states only allow dilution protection if it is made explicit in the corporation's charter.