Convertible Note Contract Template for Hong Kong

A Convertible Note Contract is a hybrid financing instrument that combines elements of debt and equity, allowing you to raise capital while deferring company valuation discussions. Under Hong Kong law, this document governs the relationship between your company as the issuer and investors as note holders, providing them with a loan that can convert into equity shares under predetermined conditions.

When do you need this document?

You need a Convertible Note Contract when seeking early-stage funding for your Hong Kong company, particularly during seed rounds or bridge financing before a formal equity round. This document is essential when your startup requires immediate capital but determining an accurate valuation is premature or when you want to expedite the fundraising process without lengthy equity negotiations. It's commonly used when existing investors want to provide additional funding between formal rounds, or when you're raising capital from angel investors or venture capital funds who prefer the flexibility of convertible instruments. The document is also necessary when you need to establish clear terms for automatic conversion upon specific triggering events, such as qualified financing rounds, company sales, or note maturity dates.

Key legal considerations

Your Convertible Note Contract must address several critical legal elements to protect both parties' interests. The conversion mechanism is fundamental, requiring clear definition of conversion triggers, conversion ratios, and valuation caps or discount rates that determine the conversion price. Interest provisions must specify the rate, calculation method, and whether interest compounds or converts alongside the principal amount. You must include detailed representations and warranties from your company regarding its legal status, financial condition, and authority to issue the notes. Default provisions should outline consequences of non-payment, breach of covenants, or other triggering events, including acceleration of maturity and potential security enforcement. Information rights provisions typically grant note holders access to financial statements, board meeting minutes, and material company developments. Consider including anti-dilution protections, transfer restrictions, and rights of first refusal to address potential conflicts with existing shareholders.

Legal requirements in Hong Kong

Under Hong Kong's Companies Ordinance (Cap. 622), your company must have proper authorization through board resolutions and, if required by your articles of association, shareholder approvals before issuing convertible notes. The Securities and Futures Ordinance (Cap. 571) may apply if the offering constitutes a securities transaction, potentially requiring compliance with prospectus requirements or qualifying for specific exemptions. You must ensure the contract complies with the Money Lenders Ordinance (Cap. 163) regarding interest rates and lending practices, particularly if your company is not a licensed money lender. Tax implications under the Inland Revenue Ordinance (Cap. 112) should be considered for both debt service payments and conversion events. The Contract and Rights of Third Parties Ordinance (Cap. 623) governs enforceability and potential third-party rights, affecting assignability provisions. Proper documentation must be filed with the Companies Registry if the notes create charges over company assets, and conversion into shares requires compliance with share allotment procedures and potentially updating your company's share register and constitutional documents.