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.

Implementing ratchets under Belgian law

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.

Anti-dilution subscription rights: The practical mechanism

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.

Why the triggering down round must be precisely defined

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.

Full ratchet vs. weighted average ratchet: Implementation differences

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.

FAQ

How is a ratchet implemented under Belgian law?

Ratchet clauses are widely accepted in Belgium, but their implementation must comply with Belgian company law. In practice, the mechanism is typically implemented through the issuance by the company of subscription rights tailored to this effect, usually referred to as anti-dilution subscription rights.

What is an anti-dilution subscription right?

It is the subscription right the company grants free of charge to the investors benefiting from the ratchet. It allows them to subscribe, for a symbolic amount, to a certain number of shares should a down round occur. It is the instrument through which a ratchet takes effect under Belgian law.

In which document are the terms of a ratchet set out?

In a fundraising, the terms of ratchet clauses are usually embedded in the subscription and shareholders’ agreement. Given the nature of such an agreement, they are therefore generally approved by all the shareholders of the company.

How should the down round that triggers a ratchet be defined?

The definition must be precise, so as to exclude share issuances that are not a down round at all (e.g. under a stock option plan). Without a sufficiently precise definition, the mechanism could be triggered by transactions the parties did not intend to treat as a down round.

What determines the number of shares a ratchet gives a right to?

The number of additional shares is determined by the calculation method agreed between the parties. This is where the distinction arises between a full ratchet and a weighted average ratchet, and, within the latter, between broad based and narrow based weighted average mechanisms. The chosen formula therefore determines the extent of the anti-dilution protection in practice.