Antidilution

Dilution occurs when new equity holders acquire the equity interests of a company and decrease the relative percentage of equity held by the existing equity holders. Antidilution protections help protect equity owners from dilution that occurs when new equity holder acquire equity interests of a company. For example, if a company plans to issue new equity, a preemptive right antidilution protection would permit the existing equity holders to purchase the new equity in lieu of potential new equity holders. Another common example of an antidilution protection is the readjustment the conversion ratio applicable to preferred stock. Preferred stock purchase agreements often provide that if the common stock of a company is reconstituted through a stock split or repurchase the conversion ratio that governs the number of common stock into which preferred stock can be converted must be proportionately adjusted so that upon conversion the preferred stock converts into an amount of common stock with the same value as the amount of common stock that the preferred stock converted into prior to the reconstitution. Another example of an antidilution protection is a mandatory approval right for any changes in a company’s equity (whether accomplished by issuance, stock split, repurchase, transfer, or otherwise) for any equity holder that would be disproportionally affected by the changes.