antidilution clause

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Antidilution Clause

1. In common and preferred stock, the right of a shareholder to maintain the same percentage of ownership in a company, should the company issue 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, the anti-dilution clause 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. Most U.S. states only recognize the anti-dilution clause if it is made explicit in the corporation's charter.

2. In convertible securities, the right of a holder to maintain the same conversion ratio in the event of a stock split. For example, if a convertible bond may be exchanged for 100 shares of common stock and there is a 2-for-1 stock split, the same convertible bond can be exchanged for 200 shares. This protects the investor from devaluation of the conversion option.

antidilution clause

A stipulation of virtually every convertible security that requires an adjustment to the conversion terms in the event of certain occurrences, such as stock splits, stock dividends, and new stock issues, that would dilute the value of the conversion privilege. As an example, a bond convertible into 40 shares of stock would have its terms changed to conversion into 120 shares if the stock split 3 for 1.
References in periodicals archive ?
Total project costs are estimated at $437 millin and HAP said another funding round will take place with current investors offered an anti-dilution clause.
Altius is participating as per an anti-dilution clause in a subscription agreement dated June 14, 2009 between Millrock and Altius.
In addition, consideration will not be treated as fixed in cases in which the contract does not contain an anti-dilution clause relating to the stock of the issuing corporation, and the issuing corporation alters its capital structure between the first date there is an otherwise binding contract and the effective date of the potential reorganization, in a manner that materially alters the economic arrangement of the contracting parties.
Likewise, in another ruling, (60) shareholders had an agreement with an anti-dilution clause applicable to only two of the shareholders.
Facts: In Letter Ruling 200329012, four S shareholders executed a shareholder's agreement that contained an anti-dilution clause applicable to only two of the shareholders.
Anti-dilution clauses also protect the venture capitalists at the expense of the common stock holders from equity dilution if fundraising occurs at lower company valuation because the firm is not doing well.

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