Anti-dilution protection mechanisms: How is a ratchet implemented in Belgium?

You now understand why an anti-dilution protection mechanism is crucial for your fundraising. However, the question remains how to implement it in Belgium.

Whereas ratchet clauses are widely accepted in Belgium, they must align with Belgian corporate law, which provides some flexibility but at the same time has specific requirements to ensure transparency and shareholder protection.

In a fundraising context, the conditions of ratchet clauses are usually embedded in the (subscription and) shareholders’ agreement. As such, due to the nature of such an agreement, they are also approved by all shareholders of the company.

Whereas we will not go into the details of the legal processes, the actual implementation under Belgian law is typically done via the issuance by the company of subscription rights, generally named “anti-dilution subscription rights”.

These anti-dilution subscription rights are attributed for free by the company to the investors benefitting from the ratchet and provide them with the right to subscribe – for a symbolic amount – to a certain number of shares at the occurrence of a down round. Hence why it is important to properly define what constitutes a down round triggering the ratchet mechanism in order to exclude, for example, an issuance of shares in the framework of a stock option plan.

How to calculate this “certain number of shares” is where the distinction is made between full ratchet and weighted average ratchet anti-dilution protection, and even more specifically between a broad based weighted average ratchet and a narrow based weighted average ratchet.