Adjustments for combinations: Overview, definition, and example
What is adjustments for combinations?
Adjustments for combinations refer to changes made to the number or value of shares, rights, or other securities when a reverse stock split or similar consolidation occurs. In a combination, multiple existing shares are merged into fewer, proportionally more valuable shares. Contractual provisions that include this concept ensure that references to shares, conversion ratios, or equity entitlements are adjusted to reflect the new capital structure fairly and consistently.
Why is adjustments for combinations important?
This concept is important because it preserves the economic equivalence of rights or obligations when a company changes its share count through a combination. Without these adjustments, parties holding options, warrants, convertible securities, or contractual rights tied to share numbers might be unfairly diluted or overcompensated. Including this protection ensures fairness for both the issuer and the holder after a reverse split or consolidation event.
Understanding adjustments for combinations through an example
A convertible note allows the holder to convert their investment into 1,000 shares of common stock. If the company later completes a 1-for-5 reverse stock split (a share combination), the conversion right must be adjusted. Instead of receiving 1,000 shares, the holder would now be entitled to 200 shares—preserving the original value of the conversion right under the new capital structure.
Example of how an adjustments for combinations clause may appear in a contract
Here’s how an adjustments for combinations clause may appear in a convertible securities agreement:
"In the event of any combination or consolidation of the outstanding shares of Common Stock into a lesser number of shares, the number of shares issuable upon conversion of this Note shall be proportionately adjusted, and the Conversion Price shall be correspondingly increased, to give effect to such combination."
Conclusion
Adjustments for combinations protect the integrity of contractual rights when a company restructures its share capital through reverse splits or consolidations. These provisions ensure that holders of convertible or equity-linked instruments are neither unfairly diluted nor unjustly enriched. Including such clauses in agreements helps maintain clarity, fairness, and continuity in capital markets transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.