An anti-dilution clause is a provision in a shareholder agreement that protects shareholders from the dilution of their ownership interest in a company. It is a common provision in shareholder agreements in the UK and serves to protect shareholders from dilution caused by the issuance of new shares or the issuance of securities that can be converted into shares.
The anti-dilution clause ensures that the value of each shareholder`s investment is maintained, even if the company decides to issue additional shares. The clause provides for adjustments to the conversion price of existing shares, which ensures that the value of each shareholder`s investment remains the same after the new shares are issued. This means that the anti-dilution clause is designed to protect the rights of existing shareholders by preventing them from being unfairly diluted by the issuance of new shares.
The anti-dilution clause can take several different forms. For example, it may provide for full-ratchet protection, which means that the conversion price of an existing share will be adjusted downward to reflect the new, lower valuation of the company after the issuance of new shares. Alternatively, it may provide for a weighted-average protection, which takes into account both the new and old valuations of the company when adjusting the conversion price of existing shares.
It`s important for shareholders to understand the anti-dilution clause in their shareholder agreement as it can have a significant impact on the value of their investment. They should also understand the circumstances in which the clause can be triggered. For example, the anti-dilution clause can be triggered if the company issues new shares through a private placement or initial public offering (IPO).
In conclusion, the anti-dilution clause in a shareholder agreement is an important provision that helps protect shareholders` investments from being unfairly diluted. Understanding this clause and its impact is crucial for any shareholder involved in a UK company. If you have questions about the anti-dilution clause in your shareholder agreement, it`s best to consult with a legal professional who is experienced in UK corporate law.