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A supplement to the practical-guide commerce series, covering convertible bonds as introduced into the Lebanese Code of Commerce by Legislative Decree No. 54 dated 16 June 1977 — an amendment-and-addition decree (`تعديل بعض أحكام قانون التجارة وإضافة أحكام جديدة`) whose 19 articles brought a new corporate-financing instrument into Lebanese commerce law. Convertibles are a hybrid instrument issued exclusively by the SAL, combining features of a debt instrument (creditor position with fixed interest and principal due at maturity) and of a share (the holder’s option to migrate into capital participation). The regime has been stable since enactment and was untouched by the major 2019 overhaul of the Code of Commerce.

Introduction

Convertible bonds are a hybrid financing instrument: at issue, they are transferable, indivisible instruments of equal nominal value, issued by an SAL to subscribers in return for monies advanced to the company, paying a fixed rate of interest and reimbursing principal at maturity. Unlike an ordinary debenture, however, the holder enjoys the right to convert the bond into shares — moving from the position of creditor to the position of shareholder, with the conversion itself effecting a capital increase in the company. The instrument suits mid-sized companies that may not find a deep market for plain equity: subscribers are attracted first by the debenture-style yield, then permitted to migrate into equity once the project’s viability has been proven.

This instrument completes the suite of documents issued by an SAL to capitalize the company or to finance its debt, alongside shares (Articles 102-121 of the Lebanese Code of Commerce, supplemented by Articles 121 bis 1-12 on preferred shares introduced by Law No. 308/2001) and ordinary debentures (Articles 122-143). Convertibles were brought into Lebanese commerce law in 1977 by Legislative Decree No. 54 dated 16 June 1977 — an amendment-and-addition decree (`تعديل بعض أحكام قانون التجارة وإضافة أحكام جديدة`) whose 19 new substantive articles function as a self-contained chapter within the LCC corporate-financing regime, cross-referencing the LCC’s general bonds provisions while preserving their own 1-19 internal numbering.

These 19 articles have remained unamended since 1977 — including by the major 2019 overhaul of the Code of Commerce (Law No. 126 dated 29 March 2019), which amended 121 articles of the LCC but did not touch the convertible-bonds regime.

Scope: 19 articles addressed across seven analytical headings:

1. General Framework (Articles 1-4): subordination to the ordinary-debenture regime, the 200% capital ceiling, the approval procedure, the preemptive right, the floor on issue price.
2. Conversion Mechanics (Articles 5-7): the holder’s election, timing, prohibition of capital redemption, capital reduction, and amendments to profit-distribution rules.
3. Bondholder Protection on Subsequent Issuances (Articles 8-11).
4. Subscription Reserved to Shareholders (Article 12): pre-disclosure requirements and seven mandatory disclosure items.
5. Conversion and Its Effects (Articles 13-14): dividend entitlement for the year of conversion + simplified capital-increase procedure.
6. Mergers and Absorptions (Articles 15-18): bondholder protection and the judicial-objection mechanism.
7. Nullity (Article 19): the mandatory-rule cap.

I. General Framework

Convertible bonds may only be issued by an SAL. They are governed by the general provisions on ordinary debentures in the LCC’s bonds chapter (Articles 122 et seq.) together with the specific provisions of the Decree. The aggregate amount of convertibles outstanding may not exceed twice the company’s share capital — the 200% ceiling (Article 1).

Approval of a convertible-bond issuance is vested in the Extraordinary General Assembly convened for that specific purpose. The Board of Directors must submit to the Assembly a report accompanied by a special report of the Statutory Auditors (commissaires aux comptes), specifying the dates of issuance and of conversion. The Board’s report must address the reasons for issuance, the bases for conversion into shares, and the period or periods within which the conversion right may be exercised. If the shareholders are asked to waive their preemptive right to subscribe to the bonds, the Board must state in its report the reasons for the waiver, the issue price, and the bases used to determine that price. The Statutory Auditors’ report gives their opinion on the bases proposed by the Board and, where applicable, on the proposed waiver. The Assembly resolves by the majorities provided for the Extraordinary General Assembly under Articles 193 and 195 of the Code of Commerce (Article 2).

The preemptive right to subscribe to the bonds belongs to the shareholders in accordance with Articles 105 and 112 of the Code of Commerce (the preemptive-right regime for cash share issuances), unless the Assembly resolves otherwise. An Assembly resolution approving the issuance with subscription open beyond the existing shareholders automatically entails a waiver by the shareholders of their preemptive right to the shares that will result from conversion (Article 3).

A convertible bond may not be issued at a price lower than the nominal value of the shares the holder will receive on conversion. This rule safeguards the integrity of share capital: issuance below the resulting shares’ nominal value would otherwise effect an implicit reduction of nominal capital (Article 4).

II. Conversion Mechanics

Conversion is never compulsory: it occurs only at the holder’s election, on the conditions set out in the issuance terms. The holder may choose to remain a creditor (the debenture) or to migrate into shareholder status (the share) when that path appears more advantageous (Article 5).

The issuance terms must specify the moment at which the conversion election may be made. Two structures are available: conversion within a defined window or windows (the traditional structure), or conversion at any time (the modern structure). Under the at-any-time structure, the holder may not request conversion more than one month after the bond’s maturity date — on maturity, the bond is repaid in cash and conversion is no longer available. The Board of Directors may, in the event of a capital increase or a merger, suspend the exercise of the conversion right for a period not exceeding three months. If the issuer files for a concordat préventif (preventive concordat), a fresh conversion window opens from the date the court order ratifying the concordat becomes final; each bondholder may then request conversion on the terms contained in the ratified concordat offer, migrating from creditor to shareholder in the post-concordat company (Article 6).

Bondholders are protected against capital actions throughout the life of the bonds. From the date the Extraordinary General Assembly approves the issuance and until all bonds are extinguished, the company may not redeem its share capital, reduce its share capital, or amend the rules governing distribution of profits. Where capital is reduced because of losses (the prevailing reading excepts loss-driven reductions from the prohibition) by reducing the number of shares or the nominal value, the rights of converting bondholders are reduced in the same proportion as if they had been shareholders at the date of issuance — without need for a resolution of the bondholders’ assembly (Article 7).

III. Bondholder Protection on Subsequent Issuances

Throughout the life of the bonds, the company may not issue shares to be subscribed in cash, issue further convertible bonds, capitalize reserves, profits, or issue premiums into share capital, or distribute reserves — unless the rights of bondholders who may elect to convert are preserved. Preservation requires the company to offer bondholders, depending on the case, one of three mechanisms: a non-reducible subscription to the new shares or bonds; a free allocation of new shares; or a cash or instrument payment in the same quantities, proportions, and on the same terms (save for the date de jouissance — the enjoyment date) as if they had been shareholders at the date of the new issuance. A separate lock-in rule reinforces this protection: any Extraordinary General Assembly resolution waiving the preemptive right on a new share issuance or new convertible-bond issuance must itself be approved by the assembly of convertible-bondholders, shielding them against implicit dilution (Article 8).

For capital increases or new bond issuances: if conversion takes place within defined exercise windows, the company must, at the opening of each window, resolve a further capital increase or a further issuance of convertible bonds reserved for bondholders who elect to convert or who request the additional new shares or bonds. If conversion takes place at any time, the company must offer bondholders who request conversion the right to subscribe to new shares or new convertible bonds in the same quantities, proportions, prices, and terms (save for the enjoyment date) as if they had been shareholders at the date of the new issuance. Where conversion would entitle a holder to a fractional share or bond, the fraction is paid in cash, taking into account the difference between the value of the new share or new convertible bond and its subscription price — by reference to the listed price prior to the conversion request for listed securities, and to the terms of the issuance contract for unlisted ones (whether the daily price bulletin for unlisted shares or the company’s net assets and operating results) (Article 9).

For capitalization of reserves, profits, or issue premiums: the company must transfer to a frozen reserve account the portion that may later accrue to bondholders, so that any bondholder who elects to convert can receive either the same number of free shares, the same amount, or the same number of bonds as if they had been a shareholder at the date of the capitalization. If the capital increase is effected by raising the nominal value of existing shares, the nominal value of the shares received on conversion is raised in the same proportion (Article 10).

Where the company carries out more than one of these transactions, it must comply with the protection rules in respect of each of them, observing the bondholders’ contingent rights at each stage — a cumulative discipline that prevents the protection from being frozen as successive transactions accumulate (Article 11).

IV. Subscription Reserved to Shareholders

A distinct framework applies to transactions conferring subscription rights reserved to shareholders alone (transactions not covered by Articles 8, 9, and 10). Where a company that has issued convertible bonds at any time resolves to carry out such a transaction, it must notify the bondholders by way of an announcement published in the Official Gazette, in an economic newspaper, and in a local daily newspaper, at least one month before the proposed transaction. The announcement must contain seven items:

1. The company’s name.
2. Its legal form.
3. The amount of its share capital.
4. The address of its registered office.
5. Its Commercial Register number.
6. A statement of the nature of the proposed transaction, the type of shares proposed to be issued, their nominal value, the amount payable on subscription, the amount of the subscription right, and the conditions for exercising that right.
7. The expiry date of the period within which bondholders must convert their bonds if they wish to participate in the transaction.

A parallel notice obligation applies where the Board suspends the exercise of the conversion right (Article 6): the Board must notify the bondholders at least fifteen days in advance by way of an announcement published in the same three outlets (Article 12).

V. Conversion and Its Effects

Shares received by a bondholder on conversion share in the dividends distributed for the financial year during which the conversion was requested. The temporal allocation of profits operates in favor of the new shareholder, who is not stripped of his proportionate share of dividends for the year of conversion (Article 13).

The capital increase resulting from conversion is not subject to the formalities ordinarily required for a capital increase in a joint-stock company (the Extraordinary Assembly, reports, expert verifications, and so on). The increase becomes definitive on submission of the conversion request together with the subscription document. The Board of Directors must, within one month of the close of each financial year, verify the number of shares issued by way of conversion during the year just ended and their nominal value, make the corresponding amendments to the by-laws provisions on share capital and number of shares, and arrange for registration of the amended by-laws before the Notary Public, together with the requisite Commercial Register publication and filing. This reflects the gradual nature of the capital increase: it occurs automatically on the holder’s request and is recorded on an annual basis (Article 14).

Share form of the conversion output: the Decree dates to 1977 and contemplates issuance of bonds convertible into shares without specifying the share form. Since Law No. 75 dated 27 October 2016 (as amended by Law No. 144 dated 31 July 2019 and Law No. 260 dated 5 January 2022), Lebanese SAL companies (and limited partnerships by shares) may issue only nominative shares — bearer (`أسهم لحامله`) and order (`أسهم لأمر`) shares are prohibited. The current text of Article 104 of the Code of Commerce (as amended by Law 126/2019) explicitly reflects this rule. The practical consequence for convertibles: the shares received by a bondholder on conversion must be registered in the bondholder’s name in the company’s shareholder ledger — no bearer-form delivery is available.

VI. Mergers and Absorptions

Where the issuer is absorbed into, or merges with, another company, the transaction is subject to prior approval by the assembly of bondholders — and this requirement runs from the date of issuance throughout the life of the bonds. If the bondholders’ assembly fails to approve, or fails to meet for want of a quorum, the requirement may be overridden by a resolution of the Board of Directors, published forthwith in the Official Gazette, an economic newspaper, and a local daily newspaper. The bondholders’ assembly may, however, by a relative majority of those present (irrespective of number), mandate representatives to object to the proposed transaction. The objection is filed with the commercial-disputes court of the place of the company’s registered office, within one month of the last publication formality. The court may, depending on the circumstances, dismiss the objection, order the issuer to repay the bonds, or order the absorbing company to provide guarantees if it has offered to do so and the court finds them sufficient. If the order is not complied with, the absorption or merger remains inoperative as against the objecting bondholder. The filing of an objection does not suspend the absorption or merger (Article 15).

The bondholder’s conversion right is preserved through the transaction: the holder may convert his bonds into shares of the absorbing company or of the new company (as the case may be), either within the exercise windows specified in the original issuance terms or at any time, subject to Articles 6 and 7. The conversion bases are determined by adjusting the exchange ratio specified in the issuance terms by reference to the exchange ratio used for exchanging shares of the issuer for shares of the absorbing or new company (Article 16).

The Extraordinary General Assembly of the absorbing company or of the new company must approve the absorption or merger and waive the preemptive right under Article 3, paragraph 2 — based on the expert report appointed to value the in-kind contributions, the Board’s report, and the Statutory Auditors’ special report (Article 17).

The absorbing or new company succeeds the issuer in all its obligations — whether as to conversion deadlines, prohibited transactions, or the measures necessary to safeguard bondholder rights. This automatic transfer of obligations ensures continuity of protection notwithstanding the change of issuing entity — the rule of universal succession (Article 18).

VII. Nullity

All resolutions taken in breach of the provisions of this Part are deemed null by operation of law. This is a categorical mandatory rule, reflecting the public-order character of the regime. Any resolution emanating from the corporate organs (management, assemblies, issuance, conversion) that fails to comply with the provisions of the Decree is liable to be voided, and any interested party may invoke the nullity — the company, the shareholders, the bondholders, or the creditors (Article 19).

Practical Tips

1. Only the Extraordinary General Assembly may approve a convertible-bond issuance. Approval requires the Extraordinary General Assembly + a Board report + a Statutory Auditors’ special report (Article 2). It may not be obtained by an Ordinary General Assembly resolution or by a Board resolution. Plan for an Extraordinary Assembly convened with this point on its agenda.
2. The shareholders’ preemptive right may be waived — but transparently. The preemptive right applies as a default; the Assembly may waive it expressly, provided that the Board’s report sets out the reasons for the waiver, the issue price, and the bases for determining that price (Article 3). A waiver without a reasoned justification is liable to be challenged.
3. The 200% capital ceiling. The aggregate amount of convertibles outstanding may not exceed twice the company’s share capital (Article 1). Verify the planned aggregate issuance against the ceiling before submitting the proposal to the Assembly.
4. Floor issue price = nominal value of resulting shares. A convertible bond may not be issued at a price lower than the nominal value of the shares that will result from conversion (Article 4). Any issuance at a lower price is liable to be treated as an implicit reduction of share capital — and may be voided under the nullity rule (Article 19).
5. Bondholder protection is a mandatory rule throughout the life of the bonds. The company may not prejudice bondholders’ rights throughout the life of the bonds (Articles 7-11). Any decision touching share capital (new shares or bonds, capitalization of reserves, distribution) that impinges on bondholder rights requires specific protective measures — a frozen reserve, a parallel subscription, free shares, or a cash payment. Failure to comply renders the decision null (Article 19).
6. Conversion into shares does not require the ordinary capital-increase formalities. The capital increase becomes effective on submission of the conversion request and the subscription document (Article 14). The Board is, however, required to record the amendment annually within one month of the close of accounts.
7. A merger requires bondholder-assembly approval. Any absorption or merger of the issuer requires prior approval by the bondholders’ assembly (Article 15). When planning a merger, include the bondholders’ assembly in the timetable and the deadline schedule, and be prepared for the backup route (override by Board resolution + the bondholders’ contingent objection before the commercial court).
8. Maintain a current bondholder register and communication channel. Transparency with bondholders is a prophylactic. Keep an up-to-date register of bondholder names and addresses to ensure timely compliance with the mandatory notice obligations and with the publication formalities in the Official Gazette and the economic and local daily newspapers within the prescribed deadlines (Article 12).

Conclusion

Convertible bonds are an SAL hybrid financing instrument, complementing the traditional financing instruments — the shares and ordinary debentures provided for in Articles 102-143 of the Code of Commerce. The regime introduced by Legislative Decree 54/1977 maintains a careful equilibrium between the instrument’s flexibility (the holder’s optional migration from debt to equity) and the protection of holders against subsequent decisions touching share capital (the prohibition on redemption and reduction, the parallel subscription, the frozen reserve, the categorical nullity for non-compliant resolutions). A practitioner advising an SAL on a financing transaction or a merger must be conversant with this regime to ensure compliance — failing which the underlying corporate resolutions are exposed to nullity.

Related Posts in This Cluster

Part of the Practical Guide to Lebanese Commercial Law — corporate forms series:

• Comparative Table: SAL, Holding, Offshore, and SARL Companies under Lebanese Law
• The Joint Stock Company — Part 1: Formation, Documents, and Securities (Articles 77–143)
• The Joint Stock Company — Part 2: Operations, Dissolution, and Mergers (Articles 144–225 + Book IX)
• The Limited Liability Company (SARL) — Legislative Decree 35/1967
• Holding Companies — Legislative Decree 45/1983
• Offshore Companies — Legislative Decree 46/1983

Arabic original: السندات القابلة للتحويل إلى أسهم — ملحق الجزء الثالث من الدليل العملي للقانون التجاري