Anti-Dilution Provision

A provision in a security(stock, preferred stock or option) that protects an investor from potential dilution caused by the issuance of new shares.

Though commonly seen in convertible preferred securities, we have seen companies like Merrill Lynch and Washington Mutual issue shares to sovereign wealth funds in 2008 with similar provisions. In such cases, if the company is to issue new stock at an even lower price, the investor would be fully compensated for the loss incurred by such dilution. This is extremely disadvantageous to the existing shareholder and is called “death-spiral financing” by some. Also see “Full Ratchet”

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