New tools for corporate financing in Russia-convertible loan

On 23.06.2021 the Federation Council approved the Law on Convertible Loan1. After the law is signed by the President of the Russian Federation, it will enter into force within 10 days.

In accordance with the Law, a convertible loan agreement is a loan agreement that entitles the lender (instead of returning all or part of the loan amount and paying all or part of the interest) on time and depending on the other conditions to demand from the borrower the placement of additional shares or grant an interest in the authorized capital in favor of the lender towards debt repayment.

The new contractual structure has the following characteristics:
  • (i) the borrower can be a non-public JSC or LLC
  • (ii) only a commercial organization can act as a lender. Credit and insurance organizations are not entitled to conclude such contracts.
  • (iii) the essential conditions include:
    • -the term and (or) other circumstances upon the occurrence of which the lender has the right to demand for the placement of additional shares (or an increase in the authorized capital of the company) of the borrower in fulfilment of the convertible loan agreement
    • -the price of the placement of additional shares (or price of interest in the authorized capital of the borrower acquired by the lender)
  • (iv) a convertible loan agreement for LLC is subject to notarization, while the same contract for a NJSC can be concluded in simple written form
  • (v) consent to the conclusion of a convertible loan agreement shall be approved by the general meeting of the company unanimously
  • (vi) the lender's demand may be submitted no later than three months after the date of the deadline and (or) other circumstances provided by the convertible loan agreement, if a shorter period is not established by the convertible loan agreement

It should be noted that earlier, instead of convertible loans, additional legal constructions (for example, options) were used, which helped to achieve the same goal. Therefore, the adoption of this Law will definitely make the structuring of transactions easier and provide additional financing to companies.