Legal (non)sense in shareholders’ agreements

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  • 1. Legal (non)sense in shareholders’ agreementsBrussels – 13 December 2012
  • 2. ProgrammeI. RationaleII. StructureIII. Legal issues & a-typical clauses 2
  • 3. 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
  • 4. Rationale (2) Shareholders’ agreement vs. articles of association Impact on other agreements  Investment agreement  Service or management agreement  Employee incentive schemes 4
  • 5. Typical structure1. Financing2. Categories of shares3. Transfer restrictions4. Anti-dilution5. Management & employee incentives6. Management of the company7. Reporting obligations8. Good/Bad leaver9. Profit & loss allocation10. Conflicts11. Non-compete12. Confidentiality13. Exit14. Term15. Applicable law & jurisdiction 5
  • 6. 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
  • 7. 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] 7
  • 8. Categories of shares (1) Shares  Ordinary shares  Preferred shares  Cum prefs  Shares without voting rights Bonds  Convertible bonds Profit sharing certificates 8
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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 ! 12
  • 13. 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 13
  • 14. Anti-dilution (2)Ratchets Legal implementation  Call options  No issue of new shares  Warrants  Limited in time  Convertible shares  Recent technique 14
  • 15. 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
  • 16. 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
  • 17. Management of the company (2) Voting arrangements  Legal limitations : article 551 BCC !  Limited in time  In the interest of the company  Null & void 17
  • 18. Reporting obligations Business plan – annex to SHA ? Monthly / quarterly / annual reporting Interaction with credit facilities 18
  • 19. Good / Bad leaverGood leaver  Dismissal by the company / end of management  Call and/or put agreement by the company (without serious option cause)  Market Value  Decease / retirement / permanent invalidity  Predetermined  Resignation by the employee / end of Price (cf. formula) management agreement by the manager (with serious cause company)Bad Leaver  Dismissal by the company / end of management  Call option agreement by the company (with serious cause)  Good leaver price  Bankruptcy / change of control minus discount  Resignation by the employee / end of management agreement by the manager (without serious cause company)  Serious breach shareholder or management agreement (cf. remedy period) 19
  • 20. Profit & loss allocation Dividend rights / liquidation boni Strategy  Investments / capex / buy & build Interaction with credit facilities Legal limitation: article 32 BCC  Clause Léonine 20
  • 21. 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 21
  • 22. Conflicts (2)Shoot out clauses Russian roulette Texas shoot-out Dutch auction 22
  • 23. 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 23
  • 24. 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 24
  • 25. 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
  • 26. Exit Soft commitment vs. hard commitment Timing  preferred dividend Valuation Allocation of proceeds at exit Investor exit: earn-out Non-embarrassment clause 26
  • 27. Non-compete – ConfidentialityNon-compete Limit scope & territory Interaction with management agreement & SPA Penalty clauseConfidentiality 27
  • 28. Term - Applicable law & jurisdictionTerm Limited term  10 yearsApplicable law & jurisdiction Courts vs. arbitration  Timing  Costs  Professionality  Confidentiality  Appeal 28
  • 29. Q&A 29