Refixing (Conversion Price Adjustment) Explained — Full Ratchet, Weighted Average, and Listed-Company Rules in South Korea

Refixing is the most frequently disputed clause in venture and mezzanine deals. “Whether there is refixing” matters far less than “which method it uses.”

Convertible bonds (CB), convertible and redeemable convertible preferred stock (CPS/RCPS), and bonds with warrants (BW) almost always carry a refixing clause. This single clause governs the extent of the founder’s dilution, the company’s cash burden, and even the profit and loss on the financial statements. This in-depth article gathers, in one place, the methods, math, regulation, and accounting of refixing that earlier articles in the series touched on briefly.

1. What is refixing (conversion price adjustment)?

Refixing is a clause that later adjusts the initially agreed conversion price (or warrant exercise price) in convertible bonds, convertible preferred stock, and bonds with warrants when a specified event occurs. It corresponds to what is called an anti-dilution adjustment in the United States and elsewhere.

The mechanics are simple: shares received on conversion = investment principal ÷ conversion price. So when the conversion price falls, the same investment buys more shares — and existing shareholders, especially the founder, are diluted that much more.

2. Why have it? — protecting the investor’s downside

Refixing is purely an investor-protection device, defending against two risks.

• Down-round risk — if the next round is done below my conversion price, I effectively overpaid. Refixing compensates for that loss.
• Price-drop risk (listed companies) — for listed CBs and BWs, if the share price falls below the conversion price, conversion becomes pointless, so the conversion price is lowered to track the market price.

3. What triggers refixing?

4. How do full ratchet and weighted average differ?

Down-round refixing splits into two methods by adjustment strength. This is the heart of the negotiation.

① Full ratchet — most favorable to the existing investor

The conversion price is pulled straight down to the new issue price. It matches the lowest price no matter how small the new issuance, so it is the most unfavorable to founders and to other existing shareholders without refixing protection (including early investors and employee stock options), and is, as a rule, avoided in venture practice.

② Weighted average — the practical standard

It adjusts only partially, reflecting the size (number of shares) of the new issuance; a small issuance means a small adjustment. A broad-based approach, which puts fully diluted shares (options, warrants) into the denominator, produces a smaller adjustment and favors founders; a narrow-based approach, which counts only issued shares, produces a larger adjustment and favors investors.

When refixing triggers, who gains and who loses

Refixing protects the investor who holds the clause. In a down round that investor’s conversion price falls and they receive more shares on conversion; because no new shares are minted — the same company is simply split into more pieces — everyone else’s stake is diluted accordingly.

The same down round yields very different results by method. Assume: initial conversion price 10,000 KRW / 100,000 shares before issuance / a new issuance of 20,000 shares at 5,000 KRW (raising 100 million KRW).

Why does this formula come out this way?

Weighted average boils down to one sentence: reset the conversion price to the “average value of all the company’s shares.”

Our example mixes two kinds of shares:

• 100,000 existing shares — worth 10,000 KRW each
• 20,000 new shares — worth 5,000 KRW each

Averaging these 120,000 shares: (100,000 × 10,000) + (20,000 × 5,000) = 1 billion + 100 million = 1.1 billion KRW, and 1.1 billion ÷ 120,000 = ≈ 9,167 KRW. As cheap shares mix in, the “average value” of a single share drops from 10,000 to 9,167 KRW, and the conversion price is lowered by exactly that much. That is weighted average.

The textbook formula old price × (A+B) ÷ (A+C) is the same calculation: instead of using the new issue price directly, it substitutes “how many shares would this 100 million KRW have bought at the original 10,000 KRW price (= 10,000 shares, the B in the formula)” — and the result is still 9,167 KRW.

Why is this fair? If the new issuance is small relative to the whole company, the average barely moves and the adjustment is small; if it is large, the average drops sharply and the adjustment is large. In other words, it reflects how big a shock this down round was relative to the company’s size. Full ratchet, by contrast, does not average at all: even for a single new share, it snaps the conversion price to that lowest price (5,000 KRW). That is why it ignores scale, always cuts by the maximum, and is the method most favorable to the existing investor.

Weighted average lowers the conversion price only about 8%, while full ratchet halves it, giving the investor nearly twice the shares. That is why “which method” matters far more than “whether there is refixing.”

5. What rules apply to listed companies?

Unlisted ventures set terms freely by contract, but listed-company CBs and BWs are subject to the Regulation on Issuance, Public Disclosure, etc. of Securities.

• Downward floor — the floor for downward adjustment of the conversion price is, in principle, 70% of the initial conversion price. Going below that requires a charter basis or a special resolution of the general meeting.
• Upward refixing (effective December 2021) — previously, some private CBs lowered the conversion price on a price drop but left it there even after the price recovered, letting certain investors acquire large blocks of shares cheaply. To prevent this, where the price was lowered on a market-price drop, the issuer must raise the conversion price again as the price recovers, within the cap of the initial conversion price (for private placements; public offerings are excluded). The same amendment also introduced call-option regulation.

6. What are the accounting effects?

Refixing can also affect accounting. Under K-IFRS, for a conversion right to be recognized as equity, it must meet the “fixed-for-fixed” requirement — exchanging a fixed number of shares for a fixed amount — and refixing, which varies the conversion price (and thus the share count), may fail that requirement.

In that case, the conversion right may be classified not as equity but as a derivative liability, measured at fair value each reporting period with the change recognized in profit or loss. Paradoxically, when the share price rises the liability grows, which can show up as an accounting loss. Whether this treatment applies depends on the terms and the standard applied, so confirm with the auditor in advance.

7. What are the negotiation points for founders?

Points to check before signing:

• Exclude full ratchet; use weighted average (broad-based where possible)
• Set a floor so the price cannot fall without limit
• Carve-outs — exclude stock option pools and strategic/M&A issuances from the trigger
• Limit the period — set a validity period to avoid indefinite exposure
• Check the interplay with joint-and-several liability and review the accounting effect (derivative liability) in advance

In sum, refixing is a device that “fills the investor’s downside with the founder’s equity,” and its strength is set by the method (full ratchet vs. weighted average), the basis (broad vs. narrow), the floor, and the carve-outs. Atlas Legal reviews the method and scope of refixing clauses one by one and organizes the equity impact and negotiation strategy together.

Frequently Asked Questions

To consult Atlas Legal on reviewing or negotiating a refixing clause in South Korea, please contact us at +82-32-864-8300 or info@atlaw.kr.

About the Author

Taejin Kim | Managing Partner

Corporate Counseling, Corporate Disputes, White-Collar Crime

Former Public Prosecutor | Judicial Research and Training Institute, 33rd Class

Korea University LL.B. & LL.M. (Criminal Law), University of California, Davis LL.M.

Atlas Legal | Incheon Songdo, South Korea

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