Private issuance of bonds convertible into shares by the SAS

On October 15, 2019, by means of Official Letter 220-110088, the Superintendence of Companies issued its concept regarding the possibility for simplified stock companies (SAS) to issue bonds convertible into shares. It is known that, by virtue of the provisions of Article 4 of Law 1258 of 2008, SAS are allowed to issue shares and other securities on the condition that these are not registered in the National Registry of Securities and Issuers or traded on the stock exchange. What is not well known, but legally feasible, is that any commercial company (including the SAS, as established in Official Letter 220-031511 of May 23, 2010) that is supervised by the Superintendence of Companies - according to the provisions of Decree 1026 of 1990 in force - may issue ordinary bonds or bonds convertible into shares.

The consultation analyzed by the control entity dealt with two particular aspects: 1) if in the case of private issuances of bonds convertible into shares by a SAS, it is necessary that the issuance contract be notarized before a Notary, or if, on the contrary, it could be carried out through a private document; and 2) if in a private issuance of bonds convertible into shares by a SAS, the legal representative of the bondholders is an optional or mandatory figure, and, if mandatory, which would be the competent body to appoint him and what would be the formalities to do so.

The Superintendency begins the analysis of the consultation by reviewing the validity of Decree 1026 of 1990 and clarifying that, although part of the doctrine considers that it has been repealed, the control entity does not share such opinion and therefore considers that such regulation is still in force. It should also be taken into account what was expressed by the entity in Oficio 220-293465 of December 21, 2017, according to which "this entity gives approval for the issuance of bonds to which there is a need, only in the case of supervised and controlled companies, in accordance with numeral 2 of Article 84 and Article 85 of Law 222 of 1995".

The specific questions of the consultation are answered indicating that "it is not necessary that the issuance contract be notarized before a Notary Public" and that "the representative of the bondholders is mandatory (...) [and] shall be initially appointed by the issuing company [and] the general meeting of the bondholders may, at any time, remove the representative and appoint in his place another bank, financial corporation or trust company duly authorized for such purpose".

Beyond this specific issue, it is important to remember that article 4 of Decree 1026/1990 establishes that when bonds convertible into shares are issued, these (the shares) must be registered in a stock exchange, unless such bonds are placed exclusively among its shareholders or among creditors with the purpose of capitalizing obligations of the issuing company, and as long as they are certain credits duly proven and acquired prior to the issuance of the bonds. Thus, and in compliance with the above, the possibility of issuing bonds convertible into any type of share, or bonds with coupons for the subscription of shares with different types of rights (as it is possible to do in the SAS), is an excellent tool to reorganize a company's assets.

The interesting and important aspect of the Official Letter analyzed is that, although Decree 1026/1990 expressly stipulates the possibility that the bonds to be issued are convertible into shares and determines the conditions for this to occur, the entity recognizes and credits the flexibility that the SAS have to be able, through such structure, to reorganize and optimize their debt-equity ratio.