business shareholders
Loan conversion in company shares
<p>We have a small business with the following situation:</p>

<p>3 partners with the following share distribution: 10%, 45%, 45%.</p>

<p>One of the 45% partners has made €75k loan to the company which is convertible into shares.</p>

<p>The company is currently valued at €150k.</p>

<p>Among other changes, we're doing, that partner wants to lower the threshold for extraordinary resolutions from 90% to 64%.</p>

<p>He told me that 64% is standard, although I haven't found any evidence of this being the case.</p>

<p>Here's my concern:</p>

<p>if he decides to convert the loan, that would dilute the two other partners and he would get 72.5% of the shares.</p>

<p>Is that correct? and has anyone seen 64% as a 'common' threshold?</p>

<blockquote>
  <p>Here's my concern:</p>
  
  <p>if he decides to convert the loan, that would dilute the two other
  partners and he would get 72.5% of the shares.</p>
  
  <p>Is that correct?</p>
</blockquote>

<p>This depends upon exactly how the conversion right is worded. It would be unusual, but not unprecedented, for a conversion right to depend upon the current value of the company. More often, the conversion right would establish a fixed number of shares for which $X of debt could be converted if Y and Z conditions are met.</p>

<blockquote>
  <p>and has anyone seen 64% as a 'common' threshold?</p>
</blockquote>

<p>A 64% threshold is very unusual. </p>

<p>Under Robert's Rules of Order, there are many things that can be done only with a two-third's threshold. But, those rules contemplate a situation where there are many equal participants in voting. </p>

<p>The percentage threshold for extraordinary actions in a closely held company is, instead, usually individually negotiated on a case by case basis, usually so that: </p>

<p>(1) more individual shareholders (or a the same number of shareholders with a larger percentage interest), in practice and as contemplated, have to vote yes than are required to secured an ordinary majority vote (otherwise it really isn't a supermajority at all), and </p>

<p>(2) so that either none of the major shareholders or no more than one of the major shareholders can dissent for a matter to pass, but so that minor shareholders objections can be overruled.</p>

<p>The exact percentage varies based upon the circumstances and there is no one "common" percentage across the board. </p>

<p>In a situation like this one, assuming that exercising the conversion right would give him 72.5% of the shares (leaving the remaining shareholders with a 22.5% and a 5% share respectively after dilution), any percentage above 72.5% and not in excess of 77.5% would require at least two votes for supermajority action post-conversion, any percentage in excess of 77.5% would require the converter and the now 22.5% shareholder to approve, and any supermajority in excess of 95% would require a unanimous vote post-conversion. </p>

<p>Pre-conversion, a majority requirement would require any two shareholders to approve, any percentage in excess of 55% and not in excess of 90% would require both 45% shareholders to approve, and any percentage in excess of 90% would require a unanimous pre-conversion vote.</p>

<p>Normally, in a case like that, the requirement for a supermajority would usually be any percentage in excess of 77.5% and not in excess of 90%, and a supermajority would almost never be 72.5% or less. A cut off of 80% or 85% would be pretty common in that situation (to leave room for overriding some future new small percentage interest shareholder like a key employee as well), a cut off of 75% would be uncommon but not unheard of, and a 64% supermajority would be very unusual in a case like that unless the debt converter has great economic power in the relationship (e.g. the deal just can't go forward without him).</p>
