Anti-Dilution Clauses – Recent Opinion of the Notarial District Council of Milan

By Position Paper No. 186 dated Dec. 3, 2019, the Notarial District Council of Milan confirmed the validity of such anti-dilution clauses embodied in Articles of Association to provide for the gratuitous allocation of a certain number of newly issued shares to one or more identified shareholders for the case of future capital increases with a subscription price-per-share below a predetermined threshold.

The right to be assigned a certain number of newly issued shares without any further contribution to balance and avoid a possible dilution, can be construed either as a "different right" (diritto diverso) attached to a particular category of preferred stocks or membership interests (pursuant to Sec. 2348 of the Italian Civil Code and, respectively, to Art. 26, Par. 2 D.L. 172/2012) or as a "special right" (diritto particolare) attached to a particular category of membership interests (pursuant to Sec. 2468, Par. 3 of the Italian Civil Code).

As in any similar case of disproportionate allotment of shares pursuant to Sec. 2346, Par. 4 and Sec. 2468, Par. 2, it is in any event assumed that the aggregate amount of the capital contributions subscribed by common shareholders is at least equal to the total amount of the corporate capital actually subscribed.

Depending on purpose and reach, the conversion formula set forth by such anti-dilution clauses might offer :

1. (a)a "full ratchet anti-dilution" protection, by providing for the gratuitous allotment to the preferred shareholders of a number of newly issued shares sufficient to make the price-per-share of all shares then held and subscribed by the them drop-down to the price-per-share of the future capital increase; and
   
   

2. (b)a "weighted average anti-dilution" protection (either "broad-based" or "narrow-based" depending on how the common outstanding share basis is calculated), by providing for the gratuitous allotment to the preferred shareholders of a number of newly issued shares sufficient to weight the price-per-share subscribed by them and that of the future capital increase;
   

in both cases it can also be strengthened by a "pay to play" provision to incentivize investors to partially participate to the new capital increase in order not to lose the above mentioned anti-dilution protection.

Actual purpose of anti-dilution clauses of this kind is to avoid dilution of the shares' value of certain categories of preferred shareholders irrespective of whether they do or do not subscribe the capital increase and whether or not such capital increase is designed to be offered in option to new shareholders only.

This would result to be particularly helpful to provide minority shareholders (typically minority investors or sellers retaining a minority interest in the target company) with an adequate protection mechanism against future capital increases (whether business driven or hostile), where the price-per-share is calculated by referring to an enterprise value lower than the enterprise value considered upon such initial minority shareholder's investment.