Convertible Loan Note Agreement for Canada

Convertible Loan Note Agreement Template for Canada

A Canadian Convertible Loan Note Agreement is a sophisticated financing instrument that combines elements of debt and potential future equity investment. This agreement documents the terms under which an investor provides funds to a company as a loan that can later convert into equity shares under specified conditions. The document must comply with Canadian federal and provincial securities laws, corporate law requirements, and relevant tax regulations. It typically includes detailed provisions for conversion mechanics, interest calculations, qualifying financing events, and investor protections, all structured within the Canadian legal framework.

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What is a Convertible Loan Note Agreement?

The Convertible Loan Note Agreement is a vital financing instrument in the Canadian market, particularly suitable for early-stage companies seeking to raise capital while deferring company valuation. This document establishes the terms under which investors provide funding as a loan that can convert into equity shares upon specific trigger events, such as a qualifying financing round or exit event. It must comply with Canadian securities regulations, including National Instrument 45-106 regarding prospectus exemptions, and provincial securities laws. The agreement includes essential provisions covering interest rates (subject to Criminal Code interest rate limitations), conversion mechanisms, investor rights, and company obligations. It serves as a bridge financing tool, offering investors the security of debt with the upside potential of equity investment, while providing companies with necessary growth capital under terms that align with Canadian legal and regulatory requirements.

What sections should be included in a Convertible Loan Note Agreement?

1. Parties: Identification of the Lender(s) and the Company (Borrower)

2. Background: Context of the agreement and purpose of the convertible loan

3. Definitions: Defined terms used throughout the agreement

4. Loan Amount and Drawdown: Specification of the principal amount and drawdown conditions

5. Interest: Interest rate, calculation method, and payment terms

6. Term and Repayment: Duration of the loan and repayment provisions

7. Conversion Rights: Terms and mechanics for converting the loan into equity

8. Conversion Price: Methodology for determining the price at which the loan converts to equity

9. Qualifying Financing: Definition and terms of qualifying financing triggering automatic conversion

10. Representations and Warranties: Standard declarations by both parties about their capacity and authority

11. Company Covenants: Ongoing obligations of the company during the term of the loan

12. Events of Default: Circumstances constituting default and consequences

13. Assignment and Transfer: Terms governing the transfer of the note

14. Notices: Communication requirements and contact details

15. Governing Law: Specification of Canadian law as governing law and jurisdiction

What sections are optional to include in a Convertible Loan Note Agreement?

1. Security: Include when the loan is secured against company assets

2. Information Rights: Include when lenders are granted specific information access rights

3. Board Observer Rights: Include when lenders are granted rights to observe board meetings

4. Pre-emptive Rights: Include when lenders are granted rights to participate in future fundraising

5. Most Favored Nation: Include when lenders should benefit from any better terms given to future noteholders

6. Change of Control: Include specific provisions for company sale scenarios

7. Subordination: Include when the note needs to be subordinated to other debt

8. Tax Credits: Include when relevant tax credits or benefits apply to the investment

What schedules should be included in a Convertible Loan Note Agreement?

1. Form of Conversion Notice: Template notice for exercising conversion rights

2. Cap Table: Current and post-conversion capitalization table

3. Calculation of Conversion Price: Detailed methodology and examples of conversion price calculations

4. Company Information: Key company details including corporate structure and existing security holders

5. Shareholders' Agreement: Terms that will apply post-conversion

6. Security Documentation: If secured, details of security arrangements and registration

7. Disclosure Schedule: Exceptions to representations and warranties

8. Form of Note Certificate: Template for the physical note certificate if required

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

Jurisdiction

Canada

Publisher

Genie AI

Document Type

Loan Agreement

Sector

Banking

Cost

Free to use
Relevant legal definitions
Clauses
Relevant Industries

Technology

Biotechnology

Clean Energy

Financial Services

Healthcare

E-commerce

Software Development

Manufacturing

Media and Entertainment

Consumer Products

Professional Services

Real Estate Technology

Educational Technology

Agricultural Technology

Relevant Teams

Legal

Finance

Corporate Development

Treasury

Compliance

Executive Leadership

Investment

Corporate Secretariat

Risk Management

Business Development

Relevant Roles

Chief Executive Officer

Chief Financial Officer

Chief Legal Officer

General Counsel

Investment Manager

Corporate Lawyer

Finance Director

Company Secretary

Investment Analyst

Venture Capital Associate

Private Equity Manager

Corporate Development Director

Treasury Manager

Financial Controller

Compliance Officer

Industries
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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