Adjustment in Conversion Terms

Adjustment in Conversion Terms

Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split. An adjustment in conversion terms must compute the adjusted conversion price in accordance with the Officer's Certificate, which delineates the facts on which such conversion price adjustment is based. When an adjustment is made to a conversion price, the company must compute the adjusted conversion price in accordance with the Officer's Certificate — a document signed by a senior-level company executive, such as the board chair, president, chief financial officer, the chief executive officer, controller, principal accounting officer, treasurer or general counsel. An optional conversion extends to shareholders the right to convert their preferred shares into common shares when they believe it is advantageous to do so — namely, when the buyout of the converted common shares will yield higher returns than preferred shares. Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.

Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.

What Is Adjustment in Conversion Terms?

Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.

Adjustment in conversion terms refers to a change in the conversion price to reflect the change in value of the security, such as after a stock split.
An adjustment in conversion terms can be a scheduled event or can be dependent on any related changes so that the holder of the convertible security remains unaffected.
An adjustment in conversion terms must compute the adjusted conversion price in accordance with the Officer's Certificate, which delineates the facts on which such conversion price adjustment is based.

Understanding Adjustment in Conversion Terms

This term is most commonly used to describe the adjustment made to a convertible securities' conversion factor when the exchangeable stock underlying the convertible undergoes a split. In some convertibles, an adjustment in conversion terms is a scheduled event. Otherwise, these adjustments are made in order to ensure that the holder of the convertible remains unaffected by any related changes.

For example, if a convertible security for Company ABC has an exchange privilege of one share of common stock for $50, and the common share of ABC splits 2 for 1, then the exchange ratio will be adjusted to one common share for $25.

The conversion price of a security into a convertible common stock can be adjusted under many different events, such as:

When an adjustment is made to a conversion price, the company must compute the adjusted conversion price in accordance with the Officer's Certificate — a document signed by a senior-level company executive, such as the board chair, president, chief financial officer, the chief executive officer, controller, principal accounting officer, treasurer or general counsel. The Officer's Certificate delineates the facts on which such conversion price adjustment is based. In the event of a conversion adjustment, the issuing company will usually send a notice of the new price to shareholders via first-class mail.

The conversion ratio is subject to change. Any time new shares are issued, the existing shareholders will be subject to dilution. The addition of more preferred shares or common shares will dilute the preferred shareholder as the total number of shares increases. It is common to have anti-dilution protections that adjust the conversion ratio to counteract the effect of dilution through new issuances.

Optional Conversion versus Mandatory Conversion

An optional conversion extends to shareholders the right to convert their preferred shares into common shares when they believe it is advantageous to do so — namely, when the buyout of the converted common shares will yield higher returns than preferred shares. This situation often occurs when there's a low liquidation preference multiple, coupled with a cap on a shareholder's participation rights.

In contrast, mandatory conversion rights require holders to convert their shares of preferred stock into shares of common stock. This happens automatically and is sometimes known as "automatic conversion."

Related terms:

Broad-Based Weighted Average

The broad-based weighted average is an anti-dilution provision that can protect the ownership of early preferred shareholders in a company. read more

Cashless Conversion

Cashless conversion is the direct conversion of ownership (from one ownership type to another) of an underlying asset without any initial cash outlay. read more

Conversion Price & Example

The conversion price is the price per share at which a convertible security, like corporate bonds or preferred shares, can be converted into common stock.  read more

Convertible Preferred Stock and Example

Convertible preferred stock is a hybrid security that gives holders the option to convert their preferred stock into common shares after a defined date. read more

Dilution

Dilution occurs when a company issues new stock which results in a decrease of an existing stockholder's ownership percentage of that company. read more

Dividend

A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. read more

Dividend Enhanced Convertible Stock (DECS)

Dividend Enhanced Convertible Stock (DECS) is a preferred stock that provides holders with premium dividends. read more

Embedded Option

An embedded option is a component of a financial security that gives the issuer or the holder the right to take a specified action in the future. read more

Liquidation

Liquidation is the process of bringing a business to an end and distributing its assets to claimants, which occurs when a company becomes insolvent. read more

Market Conversion Price

The market conversion price is the amount investors pay for a share when exercising their option to exchange convertible securities into common stock. read more