Convertible securities—definition
Convertible securities—definition

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Convertible securities—definition
  • What are convertible securities?
  • How different must converted securities be?
  • Distinction between convertible securities and restricted securities
  • Flowering or growth shares—convertible securities, restricted securities or post-acquisition benefit?

Convertible securities are:

  1. employment-related securities (see: What is an employment-related security?)

  2. with the capacity to convert into securities of a different description (see: What are convertible securities?)

Therefore, where a company issues securities to its employees or directors, with limited rights upon issue (for example, no dividend or voting rights) but which can be converted into ordinary shares upon the occurrence of certain trigger events, those shares will be convertible securities. Convertible securities are commonly encountered in a private equity or venture capital situation and include:

  1. convertible loan notes, and

  2. convertible preference shares

For details of the income tax treatment of convertible securities, see: Convertible securities—tax treatment

For details of the PAYE and NICs implications of convertible securities, see: PAYE implications of employment-related securities and NICs implications of employment-related securities and securities options.

What are convertible securities?

Employment-related securities will be convertible securities if at the time of acquisition:

  1. they confer on the holder an entitlement (whether immediate or deferred, conditional or unconditional) to convert them into securities of a different description

  2. a contract, agreement, arrangement or condition authorises or requires the grant of such an entitlement to the holder if certain circumstances arise, or do not arise, or

  3. a contract, agreement, arrangement or condition provides for the conversion of the securities (otherwise than by the holder) into securities of a different description

The definition of convertible securities

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