5 Business Organizations with Tax Planning § 87.05

Summary

[1]
Convertible Securities
A convertible stock, bond or warrant is one that is exchangeable for a stock, bond or warrant of a different class possessing different rights. In the vast majority of cases, the conversion right is “downstream,” that is, a senior security may be exchanged for a junior security.1
There are a few exceptions. For example, in some older cases, “upstream” conversions—from junior to senior securities—were upheld. See In re Phoenix Hotel Co. of Lexington, Ky., 83 F.2d 724 (1936), aff’g, 13 F. Supp. 24 (1935). DGCL § 151(e) provides that any stock may be convertible or exchangeable for any other stock. Section 6.01(c)(2) of the Model Act authorizes this as well.
Also, different securities may be convertible into the same kind of security; for example, bonds and preferred stock of a company may both be convertible into its common stock. The terms of any particular conversion privilege are governed by the contract between the owner of the security and the issuing ...