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It has been enshrined in legislation that a convertible loan agreement can be concluded for the purpose of investing in non-public companies

13.07.2021
5 min read
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Pepeliaev Group advises that a Federal Law[1] (the “Law”) has been adopted establishing that a convertible loan agreement can be concluded between a borrower which is a non-public company and a lender, as well as the procedure for converting a loan into a membership interest in the issued capital or shares of non-public companies.

This involves, in particular, Federal Law No. 208-FZ “On joint-stock companies” dated 26 December 1995 having been supplemented by article 323, and Federal Law No. 14-FZ “On limited liability companies” dated 8 February 1998 having been supplemented by article 191, and the legislation on the state registration, on the foreign stock exchange market, etc., having also been amended. The Law which has been adopted will come into force on 13 July 2021.

Previously, Russian legislation did not directly provide that a convertible loan agreement could be concluded. Therefore, non-public companies used other mechanisms, for instance, concluding a corporate agreement or an agreement granting an option to conclude an agreement. Usually such schemes contained one or more trigger events entailing an increase in the issued capital of a non-public company and the subsequent conversion of the debt into membership interests in the issued capital or shares of the non-public company.

The new rules allow a convertible loan agreement to be concluded between the borrower which is a non-public company and the lender. We believe that the principal purpose of the Law is to establish a more transparent procedure for investing in non-public companies, particularly in start-ups at the initial stage of their development.

The procedure for concluding a convertible loan agreement involves the aggregate of the following actions:
  1. a member of a non-public company filing an application to make an additional contribution (or, if the lender is a third party, an application to be granted membership and to make a contribution which will be set off against the lender’s monetary claims with respect to the company under the obligations arising from the convertible loan agreement);
  2. obtaining from the general meeting of the company’s members/stakeholders a unanimous prior consent to the conclusion of a convertible loan agreement;
  3. concluding a convertible loan agreement and having it notarised, without which the agreement is deemed void.
The procedure for converting a claim under a loan, in turn, involves:
  1. filing with the notary/the holder of the joint stock company’s register the lender’s claim to increase the company’s issued capital and the convertible loan agreement together with a document confirming a transfer of the loan amount to the borrower;
  2. the notary/the holder of the joint stock company’s register notifying the borrower that the lender’s claim has been received;
  3. the state registration of the amendments (provided that the borrower has no objections) or the resolution of the dispute between the borrower and the lender (if the borrower has objections).  
comment.jpgWe believe that the Law’s positive aspects manifest themselves in the automatic nature of actions carried out in the event of a conversion (except when the borrower has objections) and in the convertible loan becoming public through information about the concluded convertible loan agreement being entered into the Unified State Register of Legal Entities. Previously the fact was confidential that an agreement had been concluded between a borrower that was a non-public company, and a lender that was oriented towards the opportunity subsequently to convert the loan into a membership interest in or shares of a non-public company.

What to think about and what to do

Please note that from the date when the Law comes into force, the structuring of relationships involving a loan being converted into membership interests in the issued capital or shares of non-public companies will be possible only provided that the convertible loan agreement scheme is used that the Law has introduced. Such scheme requires mandatory notarisation and compliance with all of the conditions and deadlines provided for. The above involves a requirement which applies to limited liability companies for the notarisation of the fact that the general meeting of the company members has passed a unanimous resolution (to grant prior consent to the conclusion of a convertible loan agreement) and of the composition of the company members which were present when the resolution was being passed.

Using “old” models is becoming fairly risky, since this may result in the invalidation of the agreement.

Also, please note that a convertible loan agreement is not allowed to be concluded by a public joint stock company, a credit or non-credit financial institution, a company of strategic significance for the defence and security of the state, or by a joint stock company that has resulted from privatisation and whose shares are owned by the state or a municipality and account for over 25% of the votes at a general meeting of the shareholders.

Since the Law has been adopted, non-public companies should amend the current version of their charters if they are not allowed to increase the issued capital at the expense of third parties’ contributions.

Help from your adviser

Pepeliaev Group’s experts are monitoring amendments in corporate legislation on a real-time basis. They are ready to provide support in structuring relationships involving the conclusion of a convertible loan agreement and to provide recommendations on how to choose the optimal business solutions for any issues of corporate law.


[1] Federal Law No. 354-FZ “On amending individual items of the legislation of the Russian Federation” dated 2 July 2021.

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