Adjustment clause in case of stock split or reverse split

When a capital operation such as a stock split or reverse split occurs, the number of outstanding shares changes. To ensure that convertible bondholders are not disadvantaged, the conversion ratio must be adjusted.

1. Adjustment Principle

The principle is simple:

The total value of shares obtained through conversion must remain the same after the capital operation.

• Before the operation:Value = (Number of shares before adjustment) × (Share price)
• After the operation:Value = (Number of shares after adjustment) × (Share price)

The adjustment involves modifying the conversion ratio — i.e., the number of shares received per bond — to reflect the new share value.

2. Calculation Mechanism

The general formula for the new conversion ratio is:

New Conversion Ratio = Old Conversion Ratio × (Number of old shares / Number of new shares)

Where:

Number of old shares = Shares outstanding before the operation

• Number of new shares = Shares outstanding after the operation

Examples

Example 1: Stock Split

Scenario: A company decides on a 2-for-1 split, automatically issuing 2 new shares for every 1 old share.

• Before the split:Shares outstanding: 1 millionShare price: €100A €1000 bond converts into 10 shares (€1000 / €100)
• After the split:Shares outstanding: 2 millionShare price: €50 (halved)
• Adjusted conversion ratio:New ratio = 20 shares per bond

Result:

€1000 converts into 20 shares at €50, maintaining the same total value:

20 × €50 = 10 × €100 = €1000

Example 2: Reverse Split

Scenario: A company decides on a 1-for-5 reverse split. For every 5 old shares, shareholders receive 1 new share.

• Before the reverse split:Shares outstanding: 5 millionShare price: €10A €1000 bond converts into 100 shares (€1000 / €10)
• After the reverse split:Shares outstanding: 1 millionShare price: €50 (multiplied by 5)
• Adjusted conversion ratio:New ratio = 20 shares per bond

Result:

€1000 converts into 20 shares at €50, preserving the value:

20 × €50 = 100 × €10 = €1000

Conclusion

This adjustment clause is a standard protection mechanism.

It ensures fairness for investors and guarantees that the value of their conversion is not diluted by capital operations initiated by the issuer.