Armenia Legalizes Convertible Loans: Structuring VC and M&A Deals Under the New Civil Code

Civil Code Amendments Legalizing Convertible Loans in Armenia

On 12 May 2025, Armenia adopted amendments to the Civil Code and related company laws that expressly allow convertible loan agreements for limited liability companies (LLCs) and joint-stock companies (JSCs). The law defines a convertible loan as a debt that may be repaid by issuing a specified number and class of shares to the lender upon the agreed conditions. This closes a prior legal gap and brings local practice in line with global standards.

Officials and market observers highlight that convertible notes are a popular tool internationally for startups and growth companies, and that codifying them in Armenia should improve access to funding and cross-border capital. The move comes as Armenia's ICT/services sector expands rapidly—ICT services grew by about 24.5% year-over-year in Q1 2025, reaching 16.4% of the services economy—underscoring the demand for flexible financing structures.

For investors and founders, this reform opens a compliant pathway to structure early-stage rounds and transaction bridges domestically instead of relying on foreign law instruments.

What a Convertible Loan Is: Definitions and Core Mechanics Under the New Law

Under the amended Civil Code, a convertible loan is a loan where the borrower (an LLC or JSC) may discharge repayment by issuing a pre-agreed number and class of shares to the lender upon the conditions set in the contract.

In economic terms, the instrument combines debt-like downside protection with potential equity upside and is recognized as a "non-traditional financing" route that can defer immediate dilution until a clearer valuation emerges.

Core mechanics typically include:

• Loan principal and interest accrual terms.
• Conversion conditions and timing (for example, upon agreed events, maturity, or at borrower's option as set in the contract).
• The number/class of shares to be issued on conversion and any price formula if applicable.
• Investor protections and governance outcomes to take effect post-conversion (e.g., reserved matters, board representation), to be reflected in the charter and shareholder agreements where relevant.

Quick Checklist: Must-Have Terms in an Armenia Convertible Loan

Clause	What it Controls
Principal & interest	Economic baseline and accrual until conversion or repayment
Conversion conditions	When and how debt converts into shares
Share class/number	Exact equity the lender receives on conversion
Covenants & investor rights	Protections before and after conversion (as permitted by charter)
Events of default	Remedies if the company breaches the loan

Required Corporate Approvals and Charter Amendments: Company‑Level Procedures

The new framework requires explicit corporate actions to ensure valid issuance on conversion:

• LLC approvals: the general meeting of participants must approve the convertible loan and the company must amend its charter to authorize issuance of the agreed shares upon conversion.
• JSC approvals: JSCs may issue convertible loans within the confines of their charter and applicable company law; the charter must accommodate the issuance of the specified class/number of shares upon conversion.
• Shareholder agreements: align conversion triggers, class rights, and post-conversion governance outcomes with the charter to avoid conflicts.

Practical Steps to Implement

1. Prepare a term sheet and draft a convertible loan agreement capturing conversion terms and the precise equity to be issued.
2. Obtain the required company approvals (for an LLC, the general meeting).
3. Amend the charter to authorize issuance of the relevant shares on conversion and to embed any related governance terms.
4. Update shareholder agreements to reflect conversion, cap table outcomes, and investor rights consistent with the charter.

Tax and Regulatory Treatment: Interest, Conversion Timing and Compliance

Tax treatment of interest on convertible loans has been clarified: interest is treated as paid at the time of conversion, which helps lenders and borrowers align tax timing with the equity event. For broader tax planning around cross-border investors or exits, consult our overview of taxes in Armenia.

Conversion Timing and Compliance

Conversion can occur at the times and upon the conditions agreed by the parties in the loan contract, provided the company's charter authorizes share issuance and the necessary corporate approvals are in place.

To maintain compliance:

• Ensure the charter and shareholder agreements reflect conversion mechanics, class rights and governance changes to avoid conflicting provisions at conversion.
• Document interest accrual and conversion calculations clearly to support tax treatment at conversion.
• When involving foreign investors, consider cross-border formalities and investor protections; the reform is intended to facilitate such capital flows by providing a recognized local-law instrument.

Benefits and Risks for Startups, Investors and M&A Transactions

Benefits

• Defer valuation: raise capital now and price equity later, reducing immediate dilution for founders.
• Speed and flexibility: international investors are familiar with notes, enabling faster closings aligned with global practice.
• Risk-balanced terms: the instrument blends debt protections with equity upside, aligning incentives.

Risks

• Debt overhang: accrued interest and principal can become sizable if conversion is delayed.
• Governance shocks: without pre-agreed class rights and reserved matters, conversion may produce unexpected control shifts; this should be addressed in the charter and shareholder agreements.
• Compliance friction: insufficient approvals or missing charter language could block or delay conversion.

Investors and M&A Transactions

For investors, convertible loans offer downside protection through debt characteristics while preserving access to equity upside—one reason they are widely used in venture finance globally. Armenia's reform codifies this tool locally, expected to support venture rounds and cross-border flows.

For M&A, the ability to convert debt into equity under Armenian law can help bridge valuation gaps, structure earn-in or rollover mechanics, or finance acquisition bridges that settle in shares at closing—approaches consistent with international deal practice and now feasible under local law.

Cap Table Planning

Cap table planning is essential when using convertible loans. Practical tips:

• Model conversion scenarios: calculate ownership under different conversion dates and interest accrual levels.
• Define the class and rights clearly: if using preferred or separate classes, ensure rights are chartered to avoid post-conversion disputes.
• Coordinate with option pools: ensure your ESOP/option pool is sized appropriately pre- or post-conversion, consistent with investor expectations.
• Sequence future rounds: align note terms with your next priced round to minimize unexpected dilution.

Conclusion

With the Civil Code Armenia now recognizing convertible loans for LLCs and JSCs, founders and acquirers can structure flexible VC financing in Armenia and M&A Armenia transactions using a familiar, internationally-aligned tool. The key to smooth execution is early alignment of charter language, shareholder agreements, conversion mechanics, and tax timing.