Belgian Securities Regulator: Beware the Risks of Certain Convertible Bonds

In Short

The Situation: Several Belgian-listed companies have turned to very dilutive instruments (e.g., certain types of convertible bonds and equity lines) as a source of financing, which raises risks for investors and the companies issuing these.

The Result: The Belgian Financial Services and Markets Authority ("FSMA") warns investors that such financial instruments can significantly negatively impact existing shareholders by way of dilution and negative pressure on the share price. It also emphasizes relevant company reporting obligations and directors' liability.

Looking Ahead: The risks of very dilutive financial instruments have caught the attention of financial regulators in Europe, who will likely continue to scrutinize these. Listed companies and their directors must exercise particular caution before issuing such dilutive financial instruments, including awareness of their obligations and potential liabilities in using such type of financing.


The Belgian FSMA issued a warning on February 1, 2023, regarding dilutive instruments, such as certain types of convertible bonds and equity lines. In France, similarly, the financial regulator AMF issued a warning in March 2022, following an upsurge in complaints from individual shareholders who lost a large part of their investments in listed companies. 

A New (Risky) Trend

Ordinarily, a convertible bond is a financial instrument that resembles a regular bond, with the exception that bondholders are entitled to convert the bonds into shares of the issuer (subject to a specific timeframe/conditions). Upon such conversion, the value of the bond is converted into shares in exchange for the payment of a conversion price instead of recovering the principal in cash. The conversion price is set at the time of issuing the bond and usually reflects a premium compared to the then-prevailing market price. 

However, a new trend has emerged on the market for the issuance of convertible bonds with a conversion price determined at the time of the conversion, embedding a discount on the then-prevailing market price. The FSMA has observed discounts from 5% to 8% and up to 20% on the Belgian market. 

This scheme was facilitated by the entry into force in 2019 of the Belgian Code of Companies and Associations ("BCCA"), which abolished the former mandatory minimum issue price required when the preferential subscription right is cancelled in favor of one or more specific persons.

Most Belgian listed companies that have turned to this type of financing are life sciences companies in financial distress. Such dilutive financial instruments can look like an appealing way to raise funds quickly, most of the time without requiring a prospectus. Generally, issuers use the authorized capital procedure when resorting to these sorts of instruments (see below).

The FSMA, however, observes that investors providing this type of financing usually have no intention of becoming long-term shareholders and that the shares acquired upon conversion of the bonds are rapidly sold on the market. Furthermore, the FSMA notes that some of those investors might also hold short positions and actually benefit from the share price going down upon conversion. 

Risks for Shareholders 

The FSMA warns of the significant impact of this new form of convertible bonds on existing shareholders. First, the conversion of the bonds into shares may lead to a substantial dilution of the existing shareholders' interest. Some cases revealed a nine-fold increase in the number of shares, corresponding to a dilution of about 90% for existing shareholders. Consequently, a shareholder who previously owned 10% of a company's shares would be left with only 1% of such shares. 

In addition, the risk also arises of downward pressure on the share price. The FMSA cites an AMF study that scrutinized 69 companies using these kinds of financing mechanisms, revealing that 83% of these companies saw their stock price evolve downwards. For 65% of the companies, their share price dropped by more than 50%. 

Risks for Directors

Finally, the FSMA warns that directors may be held liable for implementing very dilutive financial instruments when these detrimentally impact the company. The FSMA reminds that the board of directors must draw up a report explaining the transaction and the issue price, with particular attention to the company's financial situation, the identity of the investors, and the nature and amount of their contribution. Such a report must also include a description of the terms and conditions of such financial instruments, the impact on existing shareholders, and their potential dilution in various scenarios, and an explanation of bondholders' objectives.

In addition, the decision-making surrounding the issuance of such financial instruments may constitute inside information. Therefore, companies should pay close attention to the disclosure obligations of inside information under the Market Abuse Regulation ("MAR"). 

Two Key Takeaways  

  1. Listed companies and their directors should proceed carefully when contemplating very dilutive financial instruments for financing and must be aware of their responsibilities and the triggering of potential liabilities. 
  1. Existing shareholders should be aware of the risks of significant dilution and downward pressure on the share price when a company announces its use of very dilutive financial instruments as a source of funding.
Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.