ArmInfo. The Armenian government proposes to amend the Civil Code of the Republic of Armenia, the laws "On Limited Liability Companies" and "On Joint-Stock Companies" that define the concept of a convertible loan agreement and the main conditions for its application, taking into account business relations established in the world and in the Republic of Armenia.
The National Assembly of the Republic of Armenia, at a plenary session on March 5, introduced amendments to the package of relevant laws in the first reading.
Presenting the amendments, RA Minister of Economy Gevorg Papoyan noted that convertible notes are a popular investment instrument worldwide, through which companies are financed. "During discussions with foreign and local investment and venture funds, business angels and organizations representing the private sector, the latter emphasized the need for comprehensive regulation of the convertible debt instrument in Armenia," the minister emphasized, adding that investments through convertible debt are usually made in startups and companies at early stages of development. According to the head of the Ministry of Economy, investing through this mechanism allows investors and companies seeking investment to balance risks and reach more mutually beneficial agreements. In particular, when making such financial investments, investors often want to convert these investments into shares in the future, if the company's financial situation improves, instead of receiving a loan amount back in drams. At the same time, the participants/shareholders of the company do not want to give up the opportunity to manage at the initial stage by providing a share/stock to the investor. "This approach is often beneficial for companies that can attract investments from current or potential future participants on relatively better terms (low interest, long-term period, etc.), promising to ensure better economic indicators, in which case the conversion of debt into equity will take place," Gevorg Papoyan noted. According to him, despite the widespread international distribution of the convertible loan instrument, there are legislative obstacles to its application in Armenia, as well as the lack of the necessary structures for the application of the instrument. The Minister assured that the initiative is aimed at solving the above-mentioned problems, comprehensive regulation of the convertible loan agreement, etc. Thus, it is proposed to establish that a loan agreement under which the borrower is a joint-stock company or a limited liability company may provide that instead of the obligation to repay the loan amount or part thereof and pay interest or part thereof in the cases, manner and on the terms specified in the agreement, the borrower undertakes to allocate shares of a certain number, type and class in accordance with the procedure established by the agreement or to provide shares (convertible loan agreement) in favor of the lender.
It is also proposed to establish that the possibility of converting shares or units in a convertible loan agreement must be specified when concluding the agreement. It should be noted that the draft also provides that the definition of cases, procedure and conditions for concluding convertible loan agreements by financial organizations shall be attributed to the laws regulating the activities of financial organizations and the regulatory legal acts of the Central Bank of the Republic of Armenia. The draft also regulates the specifics of conversion in the case of providing a convertible loan in foreign currency. In particular, it is proposed to establish that in the case of providing a convertible loan in foreign currency, cash investments in the authorized capital of the borrower company shall be considered to be made in Armenian drams at the average exchange rate prevailing in the foreign exchange markets, published by the Central Bank of the Republic of Armenia on the date of receipt (or recognition as received) by the borrower company of the demand for conversion (in the case of a limited liability company - an application). In this case, the agreement on the provision of a convertible loan in foreign currency must stipulate that on the day of receipt (or recognition of receipt) by the borrower company of a demand for conversion (in the case of a limited liability company - an application), the loan is renewed and replaced with a dram loan, within the framework of which the loan amount is converted into Armenian drams at the average exchange rate established on the currency markets, published by the Central Bank on the same day. It is also proposed to regulate the procedure for making a decision on the conclusion of a convertible loan agreement by limited liability companies and joint-stock companies and the provision of shares/interests on its basis.
The draft also specifies the tax consequences associated with the conclusion of a convertible loan agreement and the fulfillment of the obligations assumed thereunder, in particular, it establishes that in the event of the conversion of a share or stake, the interest payable on the basis of a convertible loan agreement is considered paid at the time of conversion. "It is expected that the adoption of the draft law will create additional instruments for investing in companies operating in Armenia, especially in the field of information technology. Legal regulation of these instruments will help attract investments and investors, clearly regulate the relations arising between the parties to a convertible loan agreement, stability and predictability of legal relations, and increase the investment attractiveness of Armenian companies," Papoyan said. It should be noted that the draft was developed by the Ministry of Economy of the Republic of Armenia and the Investment Council of the European Bank for Reconstruction and Development.
