Convertible securities: what are convertible securities?
Definition of “convertible securities”
Securities (see ERSM20110) are defined in ITEPA03/S436 as convertible securities if:
- The securities carry an entitlement for the holder to convert them into securities of a different description. The securities are convertible securities even if the entitlement to convert is subject to the satisfaction of conditions.
- An entitlement to convert is or may be granted at some time after the securities were acquired. This entitlement may be granted by contract, agreement, arrangement or condition as well as under the Articles of Association of the company whose securities are being issued.
- A contract, agreement, arrangement or condition allows the securities to be converted by someone other than the person holding the securities.
The old legislation only applied to company shares, the new legislation applies to all securities (see ERSM20110) including company loan stock. It applies to such convertible securities whether or not they were acquired before 1 September 2003, the “appointed day” when the legislation came into force. The legislation is therefore not “grandfathered”.
The old legislation was predicated on conversion of one class of shares to a different class of shares. So, for example, non-voting A-shares might convert into voting ordinary shares. Such classes of share would be denominated in the articles of association of the company. The new legislation covers a broad area and conversion is not restricted to defined classes of shares but to any security which changes its description by, for example, acquiring extra rights. See ERSM40030 for flowering shares.
If securities convert into other securities automatically after a fixed period of time, or on a particular event, this will still be a conversion for the purposes of Chapter 3.