Martin,
The 5% limitation is common in floorless deals, and is basically meaningless. Firstly, if the holder shorts before converting, then that holder is in no danger of hitting the 5% limit, as the converted shares will immediately be used to cover the short. (Remember the conversion doesn't necessarily happen all at once, instead it can happen in dribs and drabs.)
Secondly, if there are a number of investors, the limit is 5% per group.
Finally, there is often a provision tucked away somewhere about what happens if you hit the 5% limit (or the limit on the number of shares authorized or authorized for listing) - typically a forced redemption. (I haven't looked for this clause in the morass of this agreement).
By the way, people shouldn't think of the preferred holders as hell-bent on driving the stock down to maximize the number of shares they get. What serves their interests best is to have a 21 day period in which they sell shares (short) without depressing the price except on 3 particular days where they want the price to be as low as possible.
Their profits come from the differential in price between these 3 days and the rest of the period.
I have never seen a discussion of whether driving the price down by shorting on these days would be viewed as illegal manipulation of the stock price. I have no idea who these particular holders are, but even if they are good guys who would never stoop to such a thing, they can likely sell their preferred to someone else who might.
The real issue is that a deal like this creates fear and uncertainty among the shareholders and adds considerable financial complexity to the existing scientific complexity. For the next few years, the shareholders are likely going to be like restless kids on a long trip, forever whining "are they converted yet?"
Of course none of the above means that the company can't dig itself out of this financing hole by producing a spectacular partnership, deal or product.
Peter |
