Convertible Notes and Options: Two Key Legislative Developments in Armenian Corporate and Financial Law

Introduction 

This publication addresses two legislative initiatives in the field of corporate and financial law (albeit at different stages): 

- the package on convertible notes, which entered into force on June 13, 2025 (https://www.arlis.am/hy/acts/207705) and 

- the package on the regulation of options, as available on the Unified Website for the Publication of Draft Legal Acts (https://www.e-draft.am/projects/8188/about). 

Convertible notes 

Convertible notes are hybrid instruments combining two traditional forms of corporate finance - debt and equity. Debt securities that convert into equity instruments, they are widely used in financing of start-ups and companies on growth tracks . According to the amendments to the Civil Code, a loan (convertible note) agreement may provide that instead of repayment of the loan, the corporate borrower shall be obliged to distribute to the lender shares of specified quantity, type and class.

The legislative initiatives aim to establish the following features of convertible notes: 

Foreign currency convertible notes: 

Convertible notes may be issued in foreign currency, but subsequent cash investments into the charter capital of the borrowing Company shall be considered to be made in Armenian drams at the average exchange rate in the currency markets, as published by the Central Bank as of the day when the request/application for conversion is deemed to be received by the borrowing Company. 

Convertible note agreements by joint stock companies: 

To enter into a convertible note agreement, the shareholder meeting of the borrower joint stock company shall adopt a unanimous resolution, unless the charter provides that such decisions shall be adopted by 3/4 of the votes. Upon satisfying the term or condition specified in the agreement, the lender submits a written demand, after which, within a 60-day period, the Company is obliged to issue and distribute, in favor of the lender, shares of the type, class and quantity specified in the convertible note agreement. 

Convertible note agreements by limited liability companies: 

Both participants and third parties may be lenders under a loan agreement entered into by a limited liability company, unless the company's charter prohibits the increase in charter capital on the account of third-party deposits. The decision to sign a convertible note agreement shall be adopted unanimously by all participants of the company. Within the period specified in the agreement or upon satisfaction of the conditions the lender submits an application to the company’s executive body, such as the director. Within 60 days after the application is received, the company shall adopt decisions on the allocation to the lender of LLC participation interests in exchange for their capital contribution, the increase of the charter capital, and other necessary corporate decisions. 

Options 

An option agreement gives the option buyer the exclusive right (but not the obligation) to enter into a transaction in the future under predetermined conditions. Options are used in financial markets for both hedging and speculative purposes. It is also a widely used tool in ESOPs. Currently included into the list of derivative financial instruments by the RA Law "On Securities Market", options are now making their way into the Civil Code as well: the draft amendments to it and related laws provide for more comprehensive regulations. 

The draft legal acts aim to establish the following features of the option agreement։ 

Limitations: 

As highlighted above, the subject matter of an option agreement is the right to claim the performance of the actions stipulated by the agreement (usually transfer/assumption of ownership or other property rights). At the same time, the draft introduces certain restrictions. In particular, option agreements cannot regulate rights to such claims in relation to to real estate and motor vehicles. 

Additionally, the property or property right to which the option buyer has acquired a right of claim under the option agreement, cannot be transferred to a third party during the term of the agreement. 

Requirements based on the type of property: 

The draft specifies that the option agreement must specify all essential conditions of the relevant type of agreement to be entered into in the result of exercise of the option. For example, in the case of non-documentary securities, the option agreement must include the details of the relevant settlement systems and accounts. 

The option agreement must also specify the scope of restrictions in relation to the transactions with the subject matter of the option agreement. In case of seizure/confiscation of the option’s subject matter property, the option agreement shall terminate. Additionally, if a court or another competent authority imposes a lien or another restriction on alienation of the property, the property will not be transferred under the option agreement. In such cases, the owner of the property should compensate to the other party any damages incurred and the provisions of Article 414, Part 1 of the Civil Code (on the right to claim property) shall not apply. 

The right to priority of acquisition: 

In cases where there is a right to priority (first refusal right) of acquisition of the property subject to the agreement, the person entitled to such right must be notified in writing about the intention to enter into an option agreement (including about the option exercise price and other conditions) prior to the conclusion of the option agreement, and such person shall have the right to acquire the property at the option price and other option conditions within the term of the prioroty specified by the relevant law, other legal act, contract, company’s charter or other document. Otherwise, in the case of the transfer of property pursuant to the option agreement, the right to priority of acquisition will be disapplied. 

Premium and performance price: 

The option buyer pays a premium to the option seller in exchange for the right to claim performance of the actions specified in the option agreement. The option buyer can make this payment in the form of cash or other property within the period specified in the agreement. The premium is not refundable, unless otherwise provided by law (including when the option agreement is terminated due to failure to submit the claim specified therein during the option's validity period). 

The other financial element of an option agreement is the performance price (and its payment method) - the price at which the subject matter transaction be performed. 

Form of the agreement: 

The draft also provides that an option agreement shall be concluded exclusively in writing. 

Execution period/condition: 

The option exercise period is the next essential requisite of an option agreement. The draft also allows to link exercise of the option to certain conditions. In that case, the agreement must specify the circumstances in which such conditions are deemed to be satisfied and the criteria or procedure for determining the relevant date. 

Termination of the agreement: 

According to the draft, an option agreement shall be considered terminated upon the submission by the option buyer to the option seller of the option claim (as per the agreement). If such claim is not submitted within the option exercise period, then the agreement will be deemed terminated upon the expiration of the execution period. 

Tax aspects: 

For tax purposes, the moment of providing the option service by the option seller under the option agreement shall be the moment - when the option buyer submits the option claim within the option exercise period and - if such claim is not submitted, then the moment of of expiration of the option period.