Mandatory Convertible Bond Agreement Part 2: Important Provisions

This article is a continuation of the previous article published on 16 March 2026 regarding Mandatory Convertible Bond (“MCB”). In this article, we will discuss more details on the content of the MCB agreement and what distinguishes it from financing or sell and purchase agreement.

First, MCB agreement stipulates mechanism for issuance and subscription of MCB. This clause will provide guidance for the parties in issuing and subscribing to MCB, ensuring appropriate rights, obligations, and procedures. Within this clause, several key points are stipulated, such as the total value of the MCB, the issuance date, the role of the parties in the process, and the procedures for issuing and subscribing the MCB. 

Then, MCB agreement must sets out the terms and conditions of the MCB. As the MCB has been effectively subscribed, the parties will have to agree on the implementation of MCB as a financial instrument. Within this clause, core commercial and legal framework of MCB as a financial instrument are stipulated extensively to ensure protection of the MCB holder’s right. For example, this clause will set out the details of the bond, its issue price, principal amount, maturity date, and conversion mechanics. This clause also aims to protect the economic position of both parties relating to the MCB, stipulating provisions regarding adjustment and anti-dilution protections, events of defaults and consequences, and transferability of MCB.

Throughout the term of the agreement until conversion date, MCB agreement will ensure the fulfilment and protection of MCB holder’s rights. To accomplish this, MCB agreement includes covenants and undertakings clause that essentially stipulates actions that must be performed, maintained, or restricted throughout the term of the agreement until the conversion by the issuing company. This clause holds one of the most important position in an MCB agreement, which aims to protect the MCB holder’s economic interest and ensures that the issuing company does not take actions that would unfairly dilute or harm their position before conversion. Several important clauses that shall be included in MCB are as follows:

1. Corporate existence and compliance. In this point, the issuing company shall take all necessary measure to ensure its corporate existence. Then, the issuing company will be required to refrain from transferring jurisdiction, making any submission or passing any resolution for winding up, or entering merger and consolidation with any third party. The issuing company will ensure its compliance with the prevailing laws in conducting its business.
2. Financial reporting and disclosures. The issuing company should disclose its financial conditions monthly and/or annually to the MCB holders. This will provide MCB holder with transparency on the financial condition of the issuing company.
3. Restriction covenants. The issuing company is prohibited from changing its business fields, or that the issuing company is prohibited to provide or enter into any financial indebtedness without prior consent of MCB holder.
4. Information rights. The MCB holder is entitled to obtain any information on the business process of the issuing company, such as material development report, management report, compliance report, and any other information that can be agreed by the parties.
5. No event of default before conversion. The parties may agree that there shall be no event of default before the MCB is converted into the issuing company’s shares.
6. Insurance and Asset Maintenance. The MCB holder requires the issuing company to maintain an adequate insurance coverage in accordance with industry practice and nature and scale of its business. Additionally, the MCB holder may also require the issuing company to maintain certain assets that it owns, by ensuring ordinary repairs, routine maintenance and even to prohibit the transfer of such assets to a third party.

Further, the MCB agreement shall regulate the conversion method of the bond into the shares, such as the requirements, procedures, and timing. This clause can also serve as a strategy in managing a gradual transfer of control and share ownership of the company. 

Conclusion

In summary, MCB agreement goes beyond a conventional financing document. The clauses reflect the hybrid nature of the MCB as a debt-security instrument, where the investor’s initial participation resembles debt financing but ultimately converts into equity ownership.

While MCB agreements offer an attractive alternative for corporate financing, it must be drafted carefully and comprehensively to ensure that the rights and obligations of all parties are properly addressed, given the complex nature of MCBs.