SOLVING DILUTION PROBLEMS

This Article examines the impact of various dilutive corporate transac tions on warrants, rights and options to acquire common stock, and oth er securities convertible into common stock. The Article concludes tha t the standard adjustment formulas rely on simplistic assumptions and ignore many of the variables that affect the value of options and conv ertible securities. As a result, the traditional formulas will often p roduce adjustments that are either too large or too small. The Article describes various ways in which these problems might be corrected, in cluding the adoption of adjustment mechanisms that use the Black-Schol es option pricing model and other modern pricing formulas. These alter natives are quite complex, and in many circumstances the traditional f ormulas will be preferable because they are relatively easy to apply. But at a minimum, lawyers who are drafting or negotiating documents th at contain antidilution provisions should understand the theories that underly the formulas they choose, and the ways in which these formula s may produce flawed results.