Unsecured Convertible Promissory Note Template for the United Arab Emirates
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What is a Unsecured Convertible Promissory Note?
The Unsecured Convertible Promissory Note is commonly used in the UAE startup and growth company ecosystem as a bridge financing tool. It provides companies with immediate access to capital while offering investors the potential upside of equity participation. This document is particularly relevant when companies need interim financing before a larger funding round or when parties want to defer company valuation discussions. The note includes essential provisions required under UAE law, such as interest rate compliance, conversion mechanisms aligned with the UAE Commercial Companies Law, and appropriate enforcement provisions. It's typically used for amounts between AED 100,000 and AED 10 million, though larger amounts are possible. The document must carefully balance Sharia compliance considerations with conventional financing mechanisms, making it suitable for both traditional and Islamic finance structures in the UAE market.
About the Unsecured Convertible Promissory Note
An Unsecured Convertible Promissory Note is a sophisticated financing instrument that combines debt and equity features, allowing you to provide or receive funding with the option to convert the loan into company shares at a future date. Under UAE law, this document serves as both a commercial paper governed by the Commercial Transactions Law and a potential equity instrument subject to the Commercial Companies Law, making it essential for startup financing and bridge funding arrangements.
When do you need this document?
You'll need an Unsecured Convertible Promissory Note when your company requires immediate funding before a larger investment round, allowing you to defer complex valuation discussions while securing necessary capital. This document is particularly useful when you're an early-stage startup seeking seed funding, a growth company needing bridge financing between funding rounds, or an investor wanting to participate in a company's growth with both downside protection and upside potential. The convertible feature makes it ideal for situations where current company valuation is difficult to determine but future value appreciation is expected.
Key legal considerations
Your convertible note must carefully address several critical provisions to ensure enforceability under UAE law. The conversion mechanism requires precise definition of conversion triggers, including qualified financing events, maturity dates, and conversion prices or discounts. Interest rate provisions must comply with UAE Central Bank regulations and Sharia compliance requirements where applicable. You must clearly specify the conversion rights, including automatic conversion triggers, optional conversion events, and the treatment of accrued interest upon conversion. The document should address anti-dilution protections, information rights, and the borrower's representations and warranties. Additionally, you need to consider the treatment of the note in various exit scenarios, including acquisition events, and ensure proper subordination provisions if other debt exists.
Legal requirements in United Arab Emirates
Under UAE Federal Law No. 32/2021 (Commercial Companies Law), convertible instruments must comply with specific share issuance and capital increase procedures, requiring board resolutions and potentially shareholder approvals depending on the conversion terms. The UAE Federal Law No. 18/1993 (Commercial Transactions Law) governs the promissory note aspects, mandating specific formalities for commercial paper validity and enforcement. Your document must include proper party identification with UAE legal addresses, comply with Central Bank regulations regarding interest rates and lending activities, and address currency denomination requirements. For companies operating in UAE free zones, additional compliance with free zone authority regulations may be required. The note must also consider UAE insolvency laws and ensure proper documentation for potential court enforcement, including Arabic translation requirements for certain legal proceedings.
GOVERNING LAW
Applicable law
This Unsecured Convertible Promissory Note is drafted to comply with United Arab Emirates law. Key legislation includes:
UAE Federal Law No. 18/1993 (Commercial Transactions Law): Regulates commercial transactions and promissory notes in the UAE, setting requirements for validity and enforcement of commercial papers.
UAE Federal Law No. 5/1985 (Civil Transactions Law): Provides the basic framework for civil transactions, contracts, and obligations in the UAE, including principles of contract formation and enforcement.
UAE Federal Decree Law No. 14/2018 (Central Bank Law): Regulates banking and financial activities, including lending operations and financial instruments in the UAE.
UAE Federal Law No. 10/1980 (Central Bank Law): Contains provisions regarding interest rates and usury restrictions in the UAE, which are relevant for promissory notes.
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