Adjustment clause in case of share buybacks

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If a company buys back its own shares at a price significantly different from the market price, an adjustment to the exercise or conversion price of instrument sheld by investors may be triggered.

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Why is such an adjustment necessary?

The goal is to protect investors against a transaction that could harm them. A share buyback at an abnormal price can be seen as an indirect way to grant an advantage to certain shareholders at the expense of all other investors.

Two possible scenarios:

‍1. Buyback at an excessively high price (above market price)

• Selling shareholders:
  Those who sell their shares (often founders or executives) receive an amount higher than the actual value of their holdings.
• Remaining or potential shareholders:
  The company's cash which belongs to all shareholders, is used to overpay some. The company's value decrease accordingly, indirectly impoverishing shareholders who did not sell. This is a transfer of value from non-selling shareholders to sellers.
  

2. Buyback at an excessive low price (below market price)

• Selling shareholders:
  This scenario is rarer, but if it occurs, it can benefit a small circle of shareholders (e.g., the CEO's family) by allowing them to repurchase shares at a bargain price.
• Remaining shareholders:
  Their stake is diluted in favor of the priviledged group without fair compensation (the price paid is unjust)

How does the adjustment work?

The clause provides a correction mechanism to restore fairness.

• Initial situation:
   
  • A holder owns 500,000 warrants (BSA) that can be  exercised for 500,000 shares at a price of €10.

• Triggering event:
   
  • The company buys back shares from an existing shareholder, paying €25 per share—a price well above the latest valuation.
 
• Application of the adjustment clause:
   
  • The clause is activated because the buyback occurred at a price “significantly different” (in this case, higher) than the market.
   
  • The exercise price of the warrants must be revised downward. The calculation is often based on a weighted average price formula.
   
  • As a result: Instead of exercising 1 warrant for 1 share, the investor will obtain more shares. For example, the new exercise price could be adjusted to €8. Thus, for the same exercise amount of €5M, they would receive 625,000 shares (€5,000,000 / €8) instead of 500,000.

In summary, the adjustment offsets the loss in value suffered by investors by granting them a greater number of shares.

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‍Conclusion

The adjustment clause in case of a buyback at an abnormal price is a crucial safeguard for investors. It aims to prevent majority shareholders or management from carrying out transactions that would unjustifiably transfer value, preserving fairness among all shareholders.

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