Making convertible loans legally secure: Formal issues and practical recommendations

published on 21 May 2025 | reading time approx. 3 minutes

Convertible loans are a recognized and popular financing instrument not only in the venture capital sector in the early stages of a company's financing, but also for bridging short-term liquidity bottlenecks. Convertible loans offer a quickly available and flexible alternative to traditional equity and debt financing and enable the rapid procurement of capital with comparatively little effort. At the same time, they offer the investing lenders the option and, depending on the structure of the convertible loan agreement, the obligation to convert their invested loan capital into equity at a later date and thus a stake in the borrowing company. To this end, the convertible loan usually contains the agreement that the lender receives new shares in the company to be created as part of a future capital increase in return for the assignment of its loan repayment claim to the company. Due to the identity of debtor and creditor, the loan repayment claim expires as a result of the assignment (so-called confusion). The loan repayment amount is posted to the company's free capital reserves in accordance with Section 272 (2) No. 4 HGB.

The formal requirements for the conclusion of convertible loan agreements, particularly in relation to shares in a limited liability company ("GmbH"), are still the subject of controversial debate in case law and literature. In particular, the practically relevant question arises as to whether and to what extent notarization or notarization of the contractual documentation (including ancillary documents) is required for such agreements to be effective.

First of all, it should be noted that the answer to this question always depends on the specific structure of the convertible loan.

There is agreement to the extent that notarization is required pursuant to Section 15 (4) GmbHG in cases in which the convertible loan agreement in relation to shares in a GmbH provides for an obligation on the part of the lender to acquire shares or to sell shares under certain conditions. These cases typically contain provisions according to which the lender is obliged to convert its loan repayment claim under conditions whose occurrence it cannot influence and, as part of this conversion, must join a shareholders' agreement, which in turn contains certain provisions on share acquisition or disposal obligations (e.g. put and call options, day and drag-along provisions) that must be notarized.

However, the question of whether the mere agreement of a conversion obligation that goes beyond a pure conversion right, i.e. an obligation of the lender to take over the new shares to be created as part of a future capital increase, requires the formal requirement of a notarial certification or even notarization, has been controversial both in the literature and in case law.

Most recently, the Higher Regional Court of Zweibrücken (judgment of 18 September 2022 - 8 U 30/19) made a statement on this in a highly regarded decision that was heavily criticized by the literature in particular. In the opinion of the Higher Regional Court of Zweibrücken, a convertible loan agreement requires notarization if it provides for a binding conversion obligation on the part of the lender and the lender is a non-corporate person. The subsequent appeal proceedings pending with regard to the aforementioned decision of the Higher Regional Court of Zweibrücken (decision of April 25, 2023, ref. II ZR 96/22), which dealt with the decision, unfortunately did not have to clarify the legal issue, but pointed out in its decision that, according to the prevailing opinion in the literature, the transferee of a share may enter into an obligation aimed at the takeover without any formal requirements, provided that the transferee does not undertake to assume ancillary services in accordance with Section 55 (2) sentence 2 GmbHG (e.g. premium under corporate law, additional funding obligations). In addition, the BGH pointed out that the legal opinion of the OLG Zweibrücken is not supported by the case law of the higher courts, so that it is at least reasonable to assume that the BGH would tend to follow the opinion of the literature on the question of the requirements for the form of a convertible loan agreement.

Finally, the question of form has not yet been clarified with regard to the case constellation in which the convertible loan agreement only provides for a conversion right of the lender instead of a conversion obligation and no obligation to join a shareholders' agreement.

Conclusion

As a result, the individual structure of the convertible loan agreement must always be considered.

Even in those cases in which the involvement of a notary is not absolutely necessary anyway due to the above-mentioned structuring option, the notarization of the convertible loan agreement should continue to be carried out in the sense of the safest route, due to the serious risks and consequences of a formal invalidity - immediate maturity of the loan repayment claim and thus, if necessary, the occurrence of insolvency or over-indebtedness - in contrast to the financial and time advantage of a private written agreement.

Alternatively, companies and investors can conclude a separate conversion agreement. The loan agreement then only regulates the right, but not the obligation to convert. In this case, the actual conversion takes place later by means of a separate declaration to be notarized.

Furthermore, the creation of authorized capital could offer an alternative worth considering to the conclusion of a convertible loan. Although the creation of authorized capital also requires notarial certification, the authorized capital once created offers the company's management the option of flexibly increasing the company's share capital for a period of up to five years by means of a resolution of the management that only needs to be passed in writing.

Another aspect that should not be overlooked is the question of whether ancillary documents such as shareholder resolutions or shareholder agreements must be in the proper form. These play a key role in implementing and securing the conversion of the loan into shares. In this respect, too, the formal requirement depends on their content.