Adjustment clauses for convertible bonds or warrants in the event of bonus share issues

The role of the adjustment clause is to modify the terms of the financial instrument (such as its conversion price or the number of shares it entitles the holder to acquire) to exactly offset this dilutive effect.

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‍Implications for issuers and investors

• For holders of convertibles instruments: these clauses are an essential safeguard that preserves both upside potential and influence within the share capital. It is crucial to ensure that the event "bonus share issue" is explicitly listed as a trigger for adjustment in the shareholders' agreement or the issuance terms.
• For the issuing company: implementing this adjustment is a contractual obligation. The finance and legal teams must:
  1. Identify the event: record the decision to issue bonus shares.
  2. Calculate the adjustment factor: apply the contractual formula (usually weighted average) to determine the new conversion price.
  3. Notify holders: officially communicate the new conversion price.
  4. Document: keep the records of the calculations for audit and compliance purposes.

A bonus share issue is a standard corporate action, and anti-dilution adjustment clauses are designed to address it, ensuring fairness among different classes of investors.

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What are the adjustment formulas for dilutive instruments issued by a company in the event of a bonus share distribution?

When bonus shares are distributed, the adjustment formulas for dilutive financial instruments aim to preserve the economic value of the holders. This adjustment is made by modifying the conversion price (or the number of shares allocated) to exactly compensate for the technical dilution caused by the increase in the number of shares.

Calculation details and example

• Adjustment factor calculation: if a company grants 1 bonus share for every 1 share held (a 100% bonus), the number of shares forming the capital doubles. The adjustment factor is therefore:
      $\text{Old number of shares} / \text{New number of shares} = 1 / 2 = 0.5.$

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‍Conclusion

Adjustment clauses modify the exercise or conversion terms of dilutive financial instruments to maintain perfect fairness among investors, ensuring that a purely technical operation like a bonus share issue neither enriches nor impoverishes any holder.

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