Loan Conversion To Equity Agreement for United Arab Emirates

Loan Conversion To Equity Agreement Template for United Arab Emirates

A comprehensive legal document governed by UAE law that formalizes the conversion of an existing loan obligation into equity shares in the borrower company. The agreement details the conversion mechanism, including the valuation basis, number of shares to be issued, and the resulting changes in shareholding structure. It ensures compliance with UAE Federal Law No. 32 of 2021 (Commercial Companies Law) and other relevant regulations, while addressing corporate governance changes, regulatory requirements, and protecting both lender and borrower interests throughout the conversion process.

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What is a Loan Conversion To Equity Agreement?

The Loan Conversion To Equity Agreement is a critical document used in the UAE when parties wish to transform a debt obligation into an equity investment. This transformation is common in startup funding rounds, corporate restructuring, or when companies face challenges servicing debt payments. The agreement must comply with UAE Federal Law No. 32 of 2021 and other relevant regulations, particularly regarding company capital changes and share issuance. It includes detailed provisions on conversion mechanics, valuation methods, resulting shareholding structures, and necessary corporate approvals. The document is especially relevant in scenarios where lenders see greater value in becoming shareholders rather than maintaining their creditor status, or where companies seek to improve their balance sheet by reducing debt obligations. The agreement must address both UAE corporate law requirements and any applicable free zone regulations if the company operates in areas like DIFC or ADGM.

What sections should be included in a Loan Conversion To Equity Agreement?

1. Parties: Identifies the lender(s) and borrower(s), including their full legal names, registration details, and addresses

2. Background: Recitals describing the existing loan arrangement, reason for conversion, and overview of the intended transaction

3. Definitions and Interpretation: Defines key terms used throughout the agreement and establishes interpretation rules

4. Existing Loan Details: Specifies the original loan agreement details, outstanding amount, and current terms

5. Conversion Terms: Details the conversion mechanism, including conversion price/ratio, timing, and conditions precedent

6. Conversion Process: Step-by-step procedure for implementing the conversion, including corporate actions required

7. Representations and Warranties: Statements of fact and assurances from both parties regarding their capacity, authority, and the subject matter

8. New Shares and Shareholding Structure: Details of the shares to be issued, resulting ownership structure, and share rights

9. Corporate Governance: Post-conversion management rights, board representation, and voting arrangements

10. Regulatory Compliance: Provisions ensuring compliance with UAE Companies Law and other applicable regulations

11. Tax Matters: Treatment of tax implications arising from the conversion

12. Confidentiality: Obligations regarding the confidential treatment of information

13. Governing Law and Jurisdiction: Specifies UAE law as governing law and establishes jurisdiction for disputes

14. Notices: Communication procedures and contact details for formal notices

15. General Provisions: Standard boilerplate clauses including amendments, waivers, and severability

What sections are optional to include in a Loan Conversion To Equity Agreement?

1. Security Release: Required if the original loan was secured and security arrangements need to be terminated

2. Multiple Lender Provisions: Needed when multiple lenders are involved, addressing decision-making and pro-rata conversion rights

3. Regulatory Approvals: Required for regulated entities or when specific regulatory clearances are needed

4. Share Transfer Restrictions: Optional provisions restricting transfer of converted shares for a certain period

5. Anti-dilution Protection: Optional protection for the converting lender against future share dilution

6. Integration with Shareholders Agreement: Required if the conversion needs to align with an existing shareholders agreement

7. Employee Matters: Needed if the conversion affects employee stock options or similar arrangements

8. Intellectual Property Rights: Required if IP rights are relevant to the valuation or conversion terms

What schedules should be included in a Loan Conversion To Equity Agreement?

1. Existing Loan Agreement: Copy or summary of the original loan agreement being converted

2. Conversion Calculations: Detailed calculations showing conversion ratio, share numbers, and resulting ownership percentages

3. Form of Conversion Notice: Template notice for exercising the conversion right

4. Required Corporate Resolutions: Draft shareholder and board resolutions needed to implement the conversion

5. New Constitutional Documents: Updated memorandum and articles of association reflecting the new shareholding structure

6. Regulatory Filings: Forms and documents required for updating the commercial register and other authorities

7. Share Certificate Template: Form of new share certificates to be issued post-conversion

8. Valuation Report: Independent valuation supporting the conversion ratio (if applicable)

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Publisher

Genie AI

Document Type

Loan Agreement

Sector

Banking

Cost

Free to use
Relevant legal definitions
Clauses
Relevant Industries

Financial Services

Technology and Startups

Real Estate

Manufacturing

Healthcare

Retail

Professional Services

Energy

Construction

Telecommunications

Private Equity

Venture Capital

Relevant Teams

Legal

Finance

Corporate Secretarial

Compliance

Risk Management

Treasury

Corporate Development

Investment

Board of Directors

Executive Management

Relevant Roles

Chief Financial Officer

Legal Counsel

Corporate Secretary

Investment Manager

Financial Controller

Chief Executive Officer

Compliance Officer

Risk Manager

Corporate Finance Director

Investment Banker

Private Equity Manager

Venture Capital Manager

Treasury Manager

Company Director

Board Member

Industries
UAE Federal Law No. 32 of 2021 (Commercial Companies Law): This is the primary legislation governing companies in the UAE, including provisions for share capital, shareholding structures, and the issuance of new shares. It's crucial for determining the legal requirements for converting debt to equity and issuing new shares.
UAE Federal Law No. 14 of 2018 (Central Bank Law): Regulates banking and financial activities in the UAE. Relevant for any loan restructuring or conversion, particularly if the original loan was from a licensed financial institution.
UAE Federal Law No. 10 of 1980 (Central Bank Law): Contains provisions regarding monetary obligations and debt instruments in the UAE. Important for understanding the legal framework governing the original loan agreement.
Securities and Commodities Authority (SCA) Regulations: If the company is publicly listed or the conversion involves securities, SCA regulations must be considered regarding the issuance of new shares and securities regulations.
UAE Federal Law No. 5 of 1985 (Civil Transactions Law): Contains general principles of contract law and obligations that would apply to both the loan agreement and its conversion mechanism.
UAE Federal Law No. 18 of 1993 (Commercial Transactions Law): Governs commercial transactions and commercial papers, relevant for the loan aspect of the agreement and commercial relationships between parties.
UAE Federal Bankruptcy Law No. 9 of 2016: May be relevant if the loan conversion is part of a debt restructuring or involves a distressed company.
DIFC/ADGM Laws and Regulations: If the agreement involves companies in free zones like DIFC or ADGM, their specific company and financial services regulations must be considered.
Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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