Download - Legal (non)sense in shareholders’ agreements
Legal (non)sense in shareholders’ agreements
Brussels – 13 December 2012
Programme
I. Rationale
II. Structure
III. Legal issues & a-typical clauses
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Rationale (1)
What is a shareholders’ agreement? Absence of legal framework
Why a shareholders’ agreement? Stability shareholding
Further financing
Minority rights
Management of the company
Conflict resolution
Exit
…
Tailor-made approach (strategic /JV partner / PE house)
3
Rationale (2)
Shareholders’ agreement vs. articles of association
Impact on other agreements
Investment agreement
Service or management agreement
Employee incentive schemes
4
Typical structure
1. Financing
2. Categories of shares
3. Transfer restrictions
4. Anti-dilution
5. Management & employee incentives
6. Management of the company
7. Reporting obligations
8. Good/Bad leaver
9. Profit & loss allocation
10. Conflicts
11. Non-compete
12. Confidentiality
13. Exit
14. Term
15. Applicable law & jurisdiction
5
Financing (1)
Equity: Investment / Subscription of shares
Pre-closing / closing
Post closing
Buy & build
Entry of new shareholders
Valuation
Debt
Bank debt / Mezzanine/ Convertible bonds / Subordinated
shareholder loans
6
Financing (2)
Management Buy Out – Management Buy In
Envy Ratio (ER)
ratio of the price paid by investors to that paid by the
management team for their respective shares of the equity
ER = [investment by investors / % of equity] / [investment by
management / % of equity]
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Categories of shares (1)
Shares
Ordinary shares
Preferred shares
Cum prefs
Shares without voting rights
Bonds
Convertible bonds
Profit sharing certificates
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Categories of shares (2)
Tracking stock
US concept
Shares with distinct dividend rights
related to # divisions of company
Permitted under Belgian law ?
YES, but
Safeguard principles of equality shareholders, mutual interest,
and article 32 BCC (so-called Clause Léonine)
9
Transfer restrictions (1)
Free transfer of shares in a Limited Liability Company (NV/SA)
Are transfer restrictions possible ? Yes (article 510 BCC)
But, legal limitations:
Limited in time
In the interest of the company
Approval procedure or pre-emption procedure : max 6 months
10
Transfer restrictions (2)
Typical clauses in a shareholders’ agreement
Standstill
Stability shareholding
Exceptions: affiliated companies / estate planning / syndication
Pre-emption right
Tailor-made procedure
Preference right
Article 592 BCC
11
Transfer restrictions (3)
Typical clauses in a shareholders’ agreement
Approval clauses
Board approval
Tag Along / Drag Along
% shareholding (cf. change of control)
Minimum price
Non-embarrassment clause
Cf. also Exit
At all times respect of legal limitations !
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Anti-dilution (1)
Ratchet
Anti-dilution mechanism
Negative ratchet or reverse ratchet
Clause Léonine
Also: an incentive mechanism !
Positive ratchet or performance ratchet
Profit related ratchet
Exit value ratchet
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Anti-dilution (2)
Ratchets
Legal implementation
Call options
No issue of new shares
Warrants
Limited in time
Convertible shares
Recent technique
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Management & employee incentives
Envy ratio (cf. above)
Ratchet as incentive (cf. above)
Earn-out upon Exit
Other: SPP / SOP / Warrants
[p.m. change of employee to independent status]
15
Management of the company (1)
Appointment procedure Board of directors
Executive committee / Managing Director / General manager
Decision quora / veto rights Board level
Approval annual budget
Appointment general manager / key personnel
Sale / acquisition of a business or subsidiary
Re-financing of the company
…
Shareholder level Approval annual accounts
Changes to the articles of association (incl. changes share capital, changes corporate object, etc.)
Liquidation of the company
…
16
Management of the company (2)
Voting arrangements
Legal limitations : article 551 BCC !
Limited in time
In the interest of the company
Null & void
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Reporting obligations
18
Business plan – annex to SHA ?
Monthly / quarterly / annual reporting
Interaction with credit facilities
Good / Bad leaver
Good leaver Dismissal by the company / end of management
agreement by the company (without serious
cause)
Decease / retirement / permanent invalidity
Resignation by the employee / end of
management agreement by the manager (with
serious cause company)
Call and/or put
option
Market Value
Predetermined
Price (cf. formula)
Bad Leaver Dismissal by the company / end of management
agreement by the company (with serious cause)
Bankruptcy / change of control
Resignation by the employee / end of
management agreement by the manager
(without serious cause company)
Serious breach shareholder or management
agreement (cf. remedy period)
Call option
Good leaver price
minus discount
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Profit & loss allocation
Dividend rights / liquidation boni
Strategy
Investments / capex / buy & build
Interaction with credit facilities
Legal limitation: article 32 BCC
Clause Léonine
20
Conflicts (1)
Deadlock
50/50 shareholding OR veto rights
Board level / shareholder level
Cooling down period
Solutions: Casting vote chairman
Decision at higher level
Mediator
Binding decision of a third party (expert or college of experts)
Dissolution
Call & put options
Shoot out clauses
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Conflicts (2)
Shoot out clauses
Russian roulette
Texas shoot-out
Dutch auction
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Conflicts (3)
Russian roulette
A serves a notice to B, indicating that it wants to sell its
shares at a price of X EUR per share
B must either buy the shares of A at a price of X EUR per
share OR to sell its own shares to A at the same price
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Conflicts (4)
Texas shoot-out
Phase 1 A serves a notice to B, indicating that it wants to buy the shares of
B at a price of X EUR per share
B accepts the offer OR indicates that it wants to buy the shares of A at a higher price per share
Phase 2 Each party sends a sealed envelop to a third party, indicating
the price (per share) it is willing to pay for the other party’s shares E.g. A offers a price of 10 EUR per share, and B a price of 15 EUR per
share
The party with the lowest bid is obliged to sell its shares to the highest bidder at the price per share indicated by the highest bidder In our example: A will need to sell its shares at B at a price of 15 EUR
per share
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Conflicts (5)
Dutch auction or Mexican shoot out
Each party sends a sealed envelop to a third party,
indicating the price (per share) it is willing to pay for the
other party’s shares
E.g. A offers a price of 10 EUR per share, and B a price of 15
EUR per share
The party with the highest bid is entitled to buy the
shares of the lowest bidder at the price per share
indicated by the lowest bidder
In our example: A will need to sell its shares at B at a price of 10
EUR per share
25
Exit
Soft commitment vs. hard commitment
Timing
preferred dividend
Valuation
Allocation of proceeds at exit
Investor exit: earn-out
Non-embarrassment clause
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Non-compete – Confidentiality
Non-compete
Limit scope & territory
Interaction with management agreement & SPA
Penalty clause
Confidentiality
27
Term - Applicable law & jurisdiction
Term
Limited term
10 years
Applicable law & jurisdiction
Courts vs. arbitration
Timing
Costs
Professionality
Confidentiality
Appeal
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Q&A