Convertible bonds

This term refers to the law of the country selected below.

  Poland

What are convertible bonds?

Convertible bonds are bonds that entitle the bondholder to subscribe for shares issued by the company in exchange for the bonds. The Polish statutory model therefore concerns conversion of bonds into shares, not into interests in a limited liability company.

When may convertible bonds be issued?

An issue of convertible bonds must comply with the conditions set out in the Bonds Act and the applicable KSH requirements. In a joint-stock company, a resolution concerning an issue of convertible bonds falls within the competence of the general meeting and is adopted by a three-quarters majority of votes. In a simple joint-stock company, an issue of convertible bonds also requires a shareholders’ resolution adopted by a three-quarters majority of votes, unless the articles of association provide for stricter requirements. The resolution on the issue of convertible bonds and the shares to be granted in exchange for those bonds must be filed with the registry court. The terms of issue should specify, in particular, the conversion ratio and the rules governing exercise of the right to subscribe for shares.

Convertible bonds should be distinguished from bonds carrying a subscription priority right. In addition to other benefits under the bond, such bonds give the bondholder the right to subscribe for shares in priority to the existing shareholders, but they do not involve an exchange of the bond itself for shares. Existing shareholders do not have, merely by operation of law, a general right to subscribe for a proportionate part of an issue of convertible bonds. If they have a pre-emption right in respect of new shares, that right should be excluded by resolution to the extent necessary to enable bondholders to exercise their rights, subject to the applicable KSH requirements. In a joint-stock company, shares intended to satisfy conversion rights are issued through a conditional increase of the share capital; KSH provides that an increase for this purpose may be carried out only under this procedure. In a simple joint-stock company, the corresponding mechanism is a conditional issue of shares.

What is the benefit of a conversion right?

The conversion right allows the bondholder to participate in a potential increase in the value of the shares while retaining the status of a creditor under the bond until conversion. It does not eliminate risk, however: the bondholder remains exposed, among other things, to issuer credit risk, market risk, interest-rate risk, liquidity risk and risks associated with the conversion terms.   

What requirements apply to convertible bonds?

The accounting treatment of convertible bonds depends on the applicable accounting framework and the structure of the instrument. There is no general rule that the value attributable to the conversion right must always be recognised in a specific supplementary capital; presentation may differ depending on whether the issuer applies the Polish Accounting Act or IFRS. Polish law does not provide for the issue by a limited liability company of bonds convertible into its own interests.

Legal basis: Articles 19–21 of the Polish Bonds Act; Articles 393(5), 415 § 1 and 448 KSH (joint-stock company); Articles 300⁸¹(4), 300⁹⁸ § 2(3) and 300¹¹⁴–300¹¹⁷ KSH (simple joint-stock company).