An anti-dilution clause is a common feature found in shareholder agreements. This clause is meant to protect the value of shares owned by a shareholder in the event of an issuance of additional shares by the company.
In simple terms, the anti-dilution clause ensures that shareholders are not subject to dilution of their ownership percentage in the company. This can happen when new shares are issued at a lower price than the previous ones, reducing the value of the existing shares held by the shareholder.
There are two types of anti-dilution clauses – full ratchet and weighted average. The full ratchet anti-dilution clause offers the maximum protection to the shareholder. In this clause, if new shares are issued at a lower price, the conversion price of the existing shares is adjusted downwards to match the new price.
On the other hand, the weighted average anti-dilution clause takes into account the number of new shares being issued and the price at which they are being issued. This clause works by calculating a weighted average of the new share price and the original share price.
Here is an example of how an anti-dilution clause can be worded in a shareholder agreement:
“Anti-Dilution Protection. In the event that the Company issues additional shares of Common Stock at a price per share less than the price per share paid by the Investors, then the price at which the Investors’ shares were purchased shall be adjusted to the new lower price on a full ratchet basis.”
This clause provides full ratchet protection to the investors, ensuring that the value of their shares is not diluted in the event of an issuance of additional shares at a lower price.
In conclusion, an anti-dilution clause is an important feature in a shareholder agreement as it protects the value of shares held by the investor. While there are different types of anti-dilution clauses, the full ratchet and weighted average clauses are the most common. When drafting an anti-dilution clause, it is important to ensure that the wording is clear and unambiguous to avoid any confusion or dispute in the future.
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