Voluntary conversion: Overview, definition, and example
What is voluntary conversion?
Voluntary conversion refers to the process of willingly changing the structure, status, or form of an asset, organization, or financial instrument. This change is made by choice rather than by legal requirement or external pressure. Voluntary conversion can apply in various contexts, such as converting a rental property into a condominium, changing a company’s legal structure, or converting preferred shares into common stock.
For example, a business structured as a sole proprietorship might voluntarily convert into an LLC to gain liability protection and tax benefits.
Why is voluntary conversion important?
Voluntary conversion allows businesses, property owners, and investors to adapt to changing circumstances, take advantage of financial benefits, or comply with strategic goals. By choosing to convert rather than being forced by law or regulation, entities have more control over the timing and terms of the transition.
For companies, voluntary conversion can provide flexibility—such as converting preferred shares into common shares to give investors voting rights. For real estate owners, converting a property type might increase its value or marketability.
Understanding voluntary conversion through an example
Imagine a startup issues preferred shares to early investors, which come with fixed dividends but no voting rights. Later, the company grows and wants to simplify its share structure. It offers investors the option to voluntarily convert their preferred shares into common shares, allowing them to gain voting power and potentially higher returns in the long run.
In another example, a landlord owns an apartment building but decides to convert it into individually owned condominiums. The conversion is voluntary because the landlord chooses to make the change, rather than being required to do so by regulation or external pressure. The new structure allows units to be sold separately instead of being rented out.
Example of a voluntary conversion clause
Here’s how a voluntary conversion clause might appear in a contract:
"The Holder of the Preferred Shares shall have the right, at their sole discretion, to convert any or all of their Preferred Shares into Common Shares at the applicable conversion rate, subject to the terms set forth herein."
Conclusion
Voluntary conversion provides flexibility for businesses, investors, and property owners to adapt to new opportunities and financial strategies. Whether changing a corporate structure, share type, or property use, this process allows for more control and strategic decision-making.
If you’re considering a voluntary conversion and need to ensure your contract reflects the right terms, Cobrief can help review your agreement for clarity and compliance.
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.