Whats A Convertible Debenture?
A close relative to earnout arrangements is the deal involving debt that can be converted to common stock of the acquiring company known as Convertible Debentures. Like the earnout arrangement, shareholders of the acquired company have an opportunity to share in the future profits of the company by converting their debenture into common stock. One of the attractions to convertible debentures is that the acquiring company gets a tax deduction for interest paid on the debentures. There are limitations imposed on interest payment deductions exceeding $5 million when the indebtedness is consideration for two-thirds of the non-cash operating assets of the business. Be aware that the IRS may consider these debentures a second class of stock which is not allowed for subchapter S corporations.
