Conversion Price Resets and Early Redemption in Convertible Bond Subscription Agreements

Review of conversion price floors, early redemption and acceleration, call option holder designation, and disclosure obligations

When listed companies and companies preparing for a listing raise funds through privately placed convertible bonds, the conversion price reset and early redemption terms in the subscription agreement can affect the extent of equity dilution and the repayment burden. Since December 1, 2024, stricter standards have applied to exceptions to conversion price reset limits and to disclosures concerning call options and bond acquisitions before maturity.

This article outlines key considerations when reviewing conversion price reset terms, early redemption rights and acceleration events, call option holder designation and disclosure, and issuer covenants in private placement convertible bond subscription agreements.

1. Basic Structure of a Private Placement Convertible Bond Subscription Agreement

Convertible bonds are bonds that investors may convert into shares of the issuer at a specified conversion price. They are issued under Article 513 of the Commercial Act. Listed companies must also comply with the Financial Investment Services and Capital Markets Act and the Financial Services Commission’s Regulations on Issuance, Public Disclosure, etc. of Securities.

In addition to the issuance terms, a subscription agreement sets out the investor’s early redemption right, the right of the issuer or its designee to require the sale of bonds to it (a call option), acceleration events, and issuer covenants.

Because the issuance terms are reflected directly in the board resolution and public disclosures, terms that are not revised at the drafting stage may be difficult to change later.

2. Conversion Price Reset Terms and Floors

A conversion price reset, or refixing, clause reduces the conversion price when the share price falls. A lower conversion price increases the number of shares obtainable from the same bonds, diluting existing shareholders’ interests.

As a general rule, the conversion price of privately placed convertible bonds issued by listed companies cannot be reduced below 70% of the initial conversion price. Under the amendments effective December 1, 2024, a reduction below 70% requires a special resolution of the shareholders for each issuance; authorization in the articles of incorporation alone is insufficient.

If an investor requires an adjustment below this floor, the company should first assess the timetable for a shareholders’ meeting and the likelihood of securing the resolution. The agreement should also be checked carefully for the adjustment frequency and the method of calculating the reference share price.

3. Early Redemption Rights and Acceleration Events

An early redemption right (put option) allows an investor to demand repayment of principal and the agreed return before maturity. Agreements often permit periodic exercise after a specified period following issuance.

If redemption requests are concentrated at the same time, the company may have to repay a substantial amount at an unexpected point. The first exercise date, exercise intervals, and early redemption yield should be checked against the company’s funding plan.

Acceleration events may be drafted broadly. For events that are difficult for the company to control, such as an audit opinion, a trading suspension, or a change in the largest shareholder, negotiations should seek to narrow the relevant periods and scope and provide a cure period.

4. Call Option Holder Designation and Disclosure Obligations

A call option allows the issuer or its designee to purchase a portion of the bonds from the investor. The quantity that the largest shareholder and other persons subject to the restriction may acquire through call options is limited by their shareholding percentages at the time of issuance.

Under the amended regulations, when a call option holder is designated or the right is transferred to a third party, a report on material matters must disclose the specific option holder, whether consideration was received, and the amount of that consideration.

If the issuer acquires bonds before maturity, it must also disclose the reasons for the acquisition and its subsequent plans to cancel or resell them. The reference date for calculating the conversion price of privately placed convertible bonds has been clarified as the third trading day before the actual payment date.

5. Covenants and Consequences of Breach

Subscription agreements include covenants that the issuer must observe. Common examples include restrictions on additional financing and asset disposals, compliance with agreed uses of proceeds, and provision of information to investors.

If any breach of a covenant immediately triggers early redemption, even a minor breach may result in a demand for repayment of all principal and interest. Limiting the trigger to material breaches and providing a cure period is more favorable to the issuer.

Discrepancies between disclosures and contractual terms may give rise to disclosure violations. The agreement, board resolution, and report on material matters should therefore be cross-checked together.

6. Implications for Businesses

The risks of a convertible bond subscription agreement often become apparent after a decline in the share price or business performance, rather than at issuance. Reviewing conversion price reset and early redemption terms alongside the company’s funding plan helps manage both its ownership structure and liquidity.

Because the stricter disclosure standards make call option holder designations and acquisitions before maturity public to the market, companies need to align contractual terms with their disclosures and ensure that the corresponding board resolution procedures are in place.

Relevant Legislation and References

Financial Services Commission: Amendments to the Regulations on Issuance, Public Disclosure, etc. of Securities (Effective December 1, 2024)

National Law Information Center: Commercial Act, Article 513

National Law Information Center: Regulations on Issuance, Public Disclosure, etc. of Securities