6.3 Loan-based Mezzanine Instruments 301sometimes treat holders of such securities in the same way as they treat sharehold-
ers.^77
An equity kicker can also be synthetic. A virtual equity kicker means that the
lender receives a special payment that is linked to the increase of the value of the
business.^78 The profit-related amount will often not be paid until the loan matures,
because there might not be enough cash flow during the term of the loan.^79 Syn-
thetic equity kickers or tag-along rights (section 20.7) are often used in venture
capital and acquisition financing.
Alternatively, there may be a “non-equity kicker”. A non-equity kicker means
that the lender receives a fixed special payment that was previously agreed upon
after the end of the term of the loan.^80 Back-ended payments can thus function as a
“non-equity kicker”. For example, a business acquisition contract may provide
that the purchase price will be payable in instalments and that part of the purchase
price will depend on the profitability of the target.
Convertible bonds, bonds with options (warrants). A real equity kicker requires
the issuing of convertible bonds or debt securities with an option to subscribe for
shares. Share options that can be traded separately are called warrants.
Convertible bonds are usually structured in two basic ways. (a) Traditional
convertible bonds can be converted into shares issued by the debtor. The issuing
of such convertible bonds requires a decision to issue those bonds, a decision to
give subscribers of bonds the right to convert bonds to new shares, a decision to
issue shares, and possible a decision to waive existing shareholders’ pre-emptive
rights. (b) Alternatively, convertible bonds can be synthetic and structured as de-
rivative instruments. The issuer of synthetic convertible bonds can be the company
that has issued shares or a third party.
The issuer of convertible bonds will have to decide on: conversion price (the
price that will be paid by the lender on conversion); conversion ratio (the number
of shares that the lender will receive on conversion); parity or conversion value; as
well as conversion premium.
In Germany, convertible bonds and bonds with warrants can be issued by a public limited-
liability company (AG)^81 but not by a private limited-liability company (GmbH), because
the German Limited Liability Companies Act (GmbHG) does not provide for contingent
capital (conditional capital, bedingtes Kapital). A GmbH should therefore structure equity
kickers in other ways.^82 (For undercapitalisation, equity-replacing loans, and shareholder
loans, see section 6.1.)
(^77) For German law, see § 3a and § 32b GmbH. See Wiehe H, Jordans R, Roser E, Mezza-
nine Finance Structures under German Law, JIBLR 22(4) (2007) pp 220–221.
(^78) Wiehe H, Jordans R, Roser E, op cit, pp 220–221.
(^79) Ibid.
(^80) Ibid.
(^81) § 221 AktG. See also §§ 192(1) and 193 AktG (bedingtes Kapital). For tag-along rights
in a GmbH, see Diem A, op cit, § 38 number 17.
(^82) See Wiehe H, Jordans R, Roser E, op cit, pp 220–221.