Your SlideShare is downloading. ×
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Shareholders' Agreements - An Overview of the Basics
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Shareholders' Agreements - An Overview of the Basics

3,044

Published on

This slideshow outlines the more common elements of a shareholders' or buy-sell agreement.

This slideshow outlines the more common elements of a shareholders' or buy-sell agreement.

Published in: Business
0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
3,044
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
2
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Shareholders’ Agreements: An Overview of the Basics Presented by Bart Greenberg Haynes and Boone, LLP Tech Coast Venture Network Workshop March 3, 2011© 2010 Haynes and Boone, LLP
  • 2. WHO are the Parties?© 2010 Haynes and Boone, LLP
  • 3. WHO Are the Parties? • Company – Responsible for enforcing restrictions on transfer – Typically has rights under agreement, such as right to acquire shares • Founders – To ensure Company continues to be owned by people with whom they agreed to form Company • Employees – Required to become parties when they first acquire stock • exercise of a stock option • receipt of a restricted stock award© 2010 Haynes and Boone, LLP
  • 4. WHO Are the Parties? (cont.) • New investors – Often requires the execution of a shareholders’ agreement that imposes transfer restrictions on shares owned by founder and other shareholders • Spouses – Typically required in community property states© 2010 Haynes and Boone, LLP
  • 5. WHAT are the Primary Purposes?© 2010 Haynes and Boone, LLP
  • 6. WHAT Are the Primary Purposes? • Continuity – Allow existing shareholders to maintain pro rata interests – Prevents stock from falling into unfriendly hands (competitor, ex-spouse, etc.) – Provides for orderly sale of shares by shareholder who becomes disabled or ceases to be employed • Management Control – Voting agreements regarding board composition – Other protective provisions© 2010 Haynes and Boone, LLP
  • 7. WHAT Are the Primary Purposes? (cont.) • Liquidity – Can assure a source of liquidity to the estate of a deceased shareholder – Can assure a source of liquidity to minority shareholders if majority wants to sell – Can provide a mechanism for calculating the value of the stock held by the decedent • Subchapter S Election/Other Restrictions – Can be used to prevent transfers that would cause Company to no longer qualify as a Subchapter S corporation – Can restrict transfers to persons that would cause Company to lose a license or approval© 2010 Haynes and Boone, LLP
  • 8. WHAT are the Primary Provisions?© 2010 Haynes and Boone, LLP
  • 9. Restrictions on Transfer • Define Restrictions on Transferability – Unreasonable restraints on alienation are void – Include involuntary transfers by operation of law, such as bankruptcy and divorce • Define Scope of Permitted Transfers – Family members and estate planning – Distributions by institutional investors • What is Consequence of Improper Transfer? • What are Legend Requirements on Stock?© 2010 Haynes and Boone, LLP
  • 10. Right of First Refusal • Who Holds the Right? – Founder – New investor – Company – Other shareholders • What is the Proper Procedure? – Notice requirements – Who gets to go first? – How long to exercise? – Who gets over-allotment? – All or nothing?© 2010 Haynes and Boone, LLP
  • 11. Right of First Refusal (cont.) • Permitted Sales – For how long can sales be made after compliance with right of first refusal?© 2010 Haynes and Boone, LLP
  • 12. Other “Triggering” Events • Typical “Triggering” Events Include: – Death or disability – Termination of employment – Divorce – Other involuntary transfer • Affected Shareholder (or Estate) Must Offer to Sell Shares to Company and/or the Other Shareholders • Alternatively, Could Obligate Company and/or the Other Shareholders to Purchase the Shares© 2010 Haynes and Boone, LLP
  • 13. Other “Triggering” Events (cont.) • Considerations Upon Death of Shareholder – Funding through key-man insurance • Who Pays the Premiums? • Who is the Beneficiary? • Affect on Payment Terms? – Preserve tax benefits of a “cross-purchase” • Considerations Upon Divorce of Shareholder – Direct judge to award equal value of other community assets to shareholder’s spouse – If other community assets are not sufficient, right to purchase© 2010 Haynes and Boone, LLP
  • 14. Determination of Share Value • Right of First Refusal – Typically, on the same terms and conditions offered by the third party – Exceptions: Fair market value or lesser of fair market value and terms of third party offer • Optional or Mandatory Purchase Upon a “Triggering Event” – There is no outstanding offer by a third party – The following are the more typical valuation methodologies: • Periodic determinations by board or shareholders • Determination by application of a formulaic approach • Determination by independent, third party appraisal • Agreement of the parties© 2010 Haynes and Boone, LLP
  • 15. Terms of Purchase - Closing • Right of First Refusal – Typically, on the same terms and conditions offered by the third party – Exceptions: See Below • Optional or Mandatory Purchase Upon a “Triggering Event” – Typically, provisions for cash down payment and balance to be paid by promissory note – Be aware of restrictions on repurchasing stock as follows: • Insolvency and related Chapter 5 code restrictions • Covenants in debt or other financing documents© 2010 Haynes and Boone, LLP
  • 16. Certain Liquidity Provisions • Co-Sale or Tag-Along Provisions – Instead of exercising the right of first refusal, other shareholders can participate in certain sales (usually tied to a minimum percentage interest) to the third party up to their respective pro rata interests • Drag-Along Provisions – Allows certain shareholders (usually tied to a minimum percentage interest) to force other shareholders to sell – Consider impact, if any, on liquidation preferences set forth in Company’s charter documents© 2010 Haynes and Boone, LLP
  • 17. Certain Liquidity Provisions (cont.) • Double Shot-Gun – Shareholder offers to buy-out co-shareholder – Co-shareholder then has the option to either: • Accept initiating shareholder’s offer • Buy-out initiating shareholder on same terms and conditions • Compare with California Corporations Code Section 2000 – Only applicable in a 50/50 situation – Affected shareholders may avoid dissolution action by initiating 50% shareholder(s) by purchasing initiating shareholder(s)’ stock at fair market value – Application may be waived in charter documents© 2010 Haynes and Boone, LLP
  • 18. Voting Agreements • Number of Directors • Designation of Directors – Voting agreements by class – Removal and resignations • Grant of Irrevocable Proxies • Other protective provisions© 2010 Haynes and Boone, LLP
  • 19. Termination of Agreement • Company Sale • Liquidation or Dissolution • Initial Public Offering • Voluntary Agreement to Terminate – Executed by all parties to agreement; or – Executed by holders of certain percentage of stock© 2010 Haynes and Boone, LLP
  • 20. WHERE Else Could These Provisions Be Used?© 2010 Haynes and Boone, LLP
  • 21. WHERE Else Could These Provisions Be Used? • Charter documents – Advantages: • Automatically applies to all stock issued after the adoption of the restriction • More likely to be enforceable in the event of bankruptcy – Disadvantages: • Prevents individual deals and customization • Option or Stock Purchase Agreements© 2010 Haynes and Boone, LLP
  • 22. WHEN is the Right Time to Put a Shareholders’ Agreement in Place?© 2010 Haynes and Boone, LLP
  • 23. WHEN is the Right Time? • Formation – Makes sense for single shareholder company to implement – Always easier to implement before a “triggering” event • Subsequent financing – New investors will typically require a shareholders agreement to be in place as a condition to making their investment • Other Circumstances – Death of Founder – Business has changed in material manner© 2010 Haynes and Boone, LLP
  • 24. Presentation of Case Study© 2010 Haynes and Boone, LLP
  • 25. Questions? Bart Greenberg Partner 18100 Von Karman Avenue, Suite 750 Irvine, California 92612 bart.greenberg@haynesboone.com 949.202.3037 25© 2010 Haynes and Boone, LLP

×