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  • Cristina Lefter

Convertible notes under Romanian law: a financing possibility for companies

Updated: Sep 7, 2023

The English term "convertible notes" is quite common in foreign jurisdictions, especially common law jurisdictions, and refers to "a debt security that contains an option that the instrument will be converted into a predefined amount of the issuer's shares".[1] In other words, a convertible note is a debt instrument (somewhat similar to a bond) whereby a company raises finance from an investor, who in turn earns the right to repayment of the loan plus interest or conversion of the loan into equity, i.e. shares in that company at a (pre-)valued subscription value.

The concept as such is unknown to company law in Romania. However, an adaptation of this instrument can be made in the light of the framework of Company Law 31/1990 ("Company Law") and the general provisions of the Romanian Civil Code.

In practice, it is common for a loan agreement to be signed whereby the lender (investor) agrees to grant a loan to a company with the following options for repayment or extinguishment: (i) the loan would be repaid in kind, as in the case of any other ordinary loan agreement; or (ii) the loan would be converted into shares issued by the company and, where appropriate, into a share premium in the context of a capital increase made in respect of the company. In the latter case, the involvement of the company's shareholders being required for the approval of the share capital increase.

Such a contractual construction relies to a large extent on good faith in the development of business relationships, and on the willingness of the company (and its shareholders) to use the financing to fuel its business and perhaps expansion plans. Enforcing the loan-to-equity conversion provisions through the court system is, however, an approach that we consider relatively optimistic, given that the courts would be faced with an exceptional case (exceptionality being more of a disadvantage when it comes to litigation in Romania), requiring them to compensate the shareholders for their willingness to increase share capital, most likely with a share premium.

However, these convertible notes, through their flexibility - given that they alternatively allow either repayment of the loan or - often in a future round of financing that increases the market value of the company - conversion to equity at a pre-defined valuation, have established themselves as a common financing model, especially in the early life cycles of companies.

[1] Source of definition:

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