Convertible bond

This term refers to the law of the country selected below.

  Czech Republic

What is meant by the term ‘convertible bond’?

Convertible bonds are bonds issued by a joint-stock company, which grant creditors the right to convert them.

These are securities to which, in addition to the Business Corporations Act (Sections 286–294), the Bonds Act No. 190/2004 Coll., as amended, also applies on a supplementary basis; this Act defines the very nature of the security and its essential features.

When is the issue of a convertible bond permitted?

The issue of convertible bonds may be conditional upon exchange for shares already issued or upon a current resolution by the company regarding a conditional increase in share capital.

Their issue is permissible only if so provided for in the company’s articles of association. The general meeting subsequently decides on the issue of these bonds by a majority of at least two-thirds of the votes of the shareholders present, unless the company’s articles of association stipulate a stricter quorum. A notarial record must be drawn up of the general meeting’s decision.

Existing shareholders of the company have a pre-emptive right to acquire convertible or priority bonds, unless the general meeting decides to restrict or exclude the shareholders’ pre-emptive right to acquire such bonds.

What advantages do convertible bonds offer?

A convertible bond gives the holder the opportunity to share in the growth of the share price without, at the same time, bearing the risk of a fall in the value of the shares. If the company’s share price falls, the holder will not exercise the conversion right and the company must then pay the holder the full nominal value of the bond on the maturity date and pay the agreed interest throughout the term.