The Covid-19 outbreak and the resulting market downturn has had a significant adverse impact on valuations across several sectors in Southeast Asia. As companies look to raise additional rounds of financing in this new environment, “down rounds” or fund raising at valuations lower than in previous rounds of fundraising are expected to increase.

Down rounds will usually trigger anti-dilution rights attached to convertible securities that most venture capital funds have used when investing in their portfolio companies in Southeast Asia.

In certain jurisdictions in the region where investments in certain sectors may be subject to foreign equity limitations, such as in Indonesia, we have seen private equity and other foreign investors also structure their investments using convertible securities, which could entitle them to anti-dilution protection as well.

Anti-dilution rights typically operate either:

• by reducing the conversion price of convertible securities, resulting in a proportionate increase in the number of ordinary shares issuable to the investor upon conversion, or
• less commonly in Southeast Asia, by issuing additional shares to the investor at no or nominal consideration to achieve the same result.

Any adjustment of the conversion price could affect the voting and dividend rights of the shareholders as well, as preferred shareholders, for instance, usually vote and sometimes even receive dividends, on an "as converted" basis.

In this briefing note, we will discuss the common anti-dilution mechanisms and certain issues that investors and issuers need to keep in mind when structuring and implementing these provisions.

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