Convertible debt - Convertible Note Reform

The reform proposes to make additions to the Civil Code of the Republic of Armenia, the Laws "On Limited Liability Companies" and "On Joint-Stock Companies" by defining the concept of a convertible loan agreement and the main conditions of its application, based on the business practices already established in the world and in the Republic of Armenia. In particular, it is proposed to establish that the loan agreement, according to which the borrower is a joint-stock or limited liability company, may stipulate that instead of the obligation to pay back the loan amount or part of it and interest or part of them, in the cases, procedure and conditions defined by the loan agreement, the borrower is obliged to allocate to the lender the number, type and class of shares determined in accordance with the procedure defined by the contract, or provide shares (convertible loan agreement). It is also proposed to establish that the possibility of exchanging shares or shares in a convertible loan agreement should be defined at the time of signing the agreement. and the normative legal acts of the RA Central Bank. The draft also regulates the specifics of conversion in case of providing the convertible loan in foreign currency. In particular, it is proposed to establish that in the case of a convertible loan provided in foreign currency, monetary investments in the authorized capital of the borrowing company are considered to be made in AMD on the day the request for conversion (in the case of a limited liability company, the application) is received (or considered received) by the borrowing company as published by the Central Bank of the Republic of Armenia: at the average exchange rate formed in the currency markets. Moreover, the convertible loan agreement provided in foreign currency must stipulate that the demand for conversion (of the limited liability company on the day the application is received (or considered received) by the borrowing company, the loan is renewed and replaced by a dram loan, within the framework of which the loan amount is converted into Armenian drams at the average exchange rate published by the Central Bank of the Republic of Armenia for the same day and formed in the currency markets.

It is also proposed to regulate the procedure for making a decision on signing a convertible loan agreement by limited liability companies and joint-stock companies and issuing shares/participation based on it. Thus, in the case of limited liability companies, it is proposed to establish that the general meeting of the company's participants may adopt a decision on signing a convertible loan agreement. According to the proposed regulations, in order to fulfill the convertible loan agreement, in which the SP company is the borrower, the lender submits an application to the executive body of the company within the period specified by the agreement, in the case of the lender being a participant of the company, regarding the increase of the company's authorized capital, by making an additional deposit by the lender in the amount determined by the convertible loan. on the basis of the nominal value of his share, to make a decision on approving the results of deposit investment by increasing and converting the amount and approving changes to the company's charter, and a participant of the company in the case of a non-lender, to accept him as a company, to increase the company's statutory capital, and to issue a share based on the deposit amount determined by the lender (confirmation of the results of the deposit investment by means of conversion) and to approve changes to the company's charter. If provided by the convertible loan agreement that the conversion is conditioned by reaching the conditions set by the contract, then the application must contain the justification for reaching those conditions.

With regard to the conversion process by joint-stock companies according to the convertible loan agreement, the draft proposes to stipulate that the lender submits a written request for conversion to the executive body of the Company within the period specified by the agreement, and if the convertible loan agreement stipulates that the conversion is conditional on the issuance of additional shares and in favor of the lender having reached the conditions set for their placement, then the written request for conversion must contain the justification for reaching those conditions. Upon receipt of the said request by the executive body of the Company, and if the convertible loan agreement stipulates that the conversion is conditioned by reaching the conditions set for the issuance of additional shares and their allocation in favor of the lender, then within 60 days after reaching those conditions, the Company is obliged to the convertible loan agreement to issue and allocate shares in accordance with the specified type, class and quantity in favor of the lender.The draft also specified the tax consequences related to the conclusion of the convertible loan agreement and the fulfillment of the obligations assumed thereby, in particular it was established that the interest payable on the basis of the convertible loan agreement in case of conversion of a share or share, such interest is considered paid at the time of conversion.