The Convertible Loan Agreement is a sophisticated financing instrument commonly used in South Africa for companies seeking growth capital or bridge financing. It provides a hybrid solution that initially functions as a debt instrument but can transform into equity investment under predetermined conditions. This type of agreement is particularly valuable for startups and growing companies that need immediate funding but may not yet have established a clear company valuation. The document must comply with South African corporate law, financial regulations, and tax requirements, including the Companies Act 71 of 2008 and relevant financial sector regulations. It typically includes detailed provisions for loan terms, conversion mechanisms, company valuation methods, and shareholder rights post-conversion. The agreement is especially popular in the technology and innovation sectors where company valuations can be challenging at early stages.
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1. Parties: Identification of the Lender and Borrower with their full legal details
2. Background: Context of the agreement, including the purpose of the loan and the parties' intention regarding potential conversion
3. Definitions and Interpretation: Definitions of key terms used throughout the agreement and rules of interpretation
4. Loan Amount and Disbursement: Details of the loan amount, disbursement conditions, and drawdown procedures
5. Interest: Interest rate, calculation method, and payment terms
6. Repayment Terms: Repayment schedule, methods, and prepayment provisions
7. Conversion Rights: Terms and conditions for converting the loan into equity, including trigger events and conversion price/mechanism
8. Conversion Procedure: Step-by-step process for executing the conversion
9. Representations and Warranties: Statements of fact and assurances from both parties
10. Borrower Covenants: Ongoing obligations of the borrower during the loan term
11. Events of Default: Circumstances constituting default and consequences
12. Remedies: Rights and remedies available to parties in case of breach or default
13. Boilerplate Provisions: Standard legal provisions including notices, governing law, and jurisdiction
1. Security: Include when the loan is secured by specific assets or guarantees
2. Information Rights: Add when lender requires specific reporting or information access rights
3. Anti-dilution Protection: Include when protection against share dilution post-conversion is needed
4. Tag-Along Rights: Add when lender requires the right to join in sale of shares post-conversion
5. Board Representation: Include when lender requires board representation rights post-conversion
6. Change of Control Provisions: Add when specific provisions for change in company control are needed
7. Subordination: Include when the loan needs to be subordinated to other debt
8. Foreign Exchange Provisions: Add when dealing with cross-border transactions
1. Loan Details Schedule: Detailed terms of the loan including amount, interest rate, and payment schedule
2. Conversion Mechanism: Detailed calculation method for conversion price and number of shares
3. Form of Conversion Notice: Template notice for exercising conversion rights
4. Company Information: Key company details including capital structure and existing securities
5. Conditions Precedent: List of conditions to be satisfied before loan disbursement
6. Security Details: Details of any security or collateral (if applicable)
7. Required Consents and Approvals: List of necessary regulatory and corporate approvals
8. Disclosure Schedule: Exceptions to representations and warranties
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