Question on legal aspects of a deal?
Am a little confused on the legal aspects and was hoping for someone to clarify.
1) When is the shareholders agreement restated? Is it restated if there is a new round of financing and the incoming investors have requested for key terms that are currently not reflected in the shareholders agreement?
2) If the shareholders agreement is restated, I believe all existing shareholders will have to approve it again? If so, what's stopping them (the existing shareholders) from renegotiating the terms they previous agreed on?
3) In the event of a secondary purchase of shares, if the incoming investor insists on certain terms eg. reserved matters, will this result in a restatement of the shareholders agreement or can this be adequately covered in a side letter?
Thank you.
Bump? Thank you.
It's a little different with a new buyout vs. a new round of investment. I'm also using "shareholders agreement" generically - most investments come through partnerships where rules differ slightly (and the proper reference is a partnership agreement), but let's ignore the difference for now.
New buyout - sellers will sell 100% of the equity of whichever entity they are selling (or maybe less than 100% if there is rollover - but buyer will own majority control). The moment the purchase agreement gets executed, the buyer has full control to restate shareholder agreements as they see fit*. Above comment on rollover will normally not matter - whoever has voting control of an entity can revise the terms of its shareholder agreement.*
*Caveat - most shareholder agreements have minority investor protections, which will not allow the controlling shareholder to make changes that solely benefit them vs. a different party, or there may be supermajority votes for certain terms. These will all be worked out prior to the acquisition of the company so there is no disagreement.
New round of minority investment - part of the new investor's diligence will be to review the existing shareholder's agreement to ensure there are no terms that change their investment decision. Again, most of these have minority investor protections, which will be a focus on the new investor's legal diligence. If there are terms they do not agree to, they may look for the controlling shareholder to amend the shareholder's agreement, or enter into a "side letter" with the controlling shareholder that clarifies terms. Other minority investors can protect themselves against such side letters by ensuring they have a most-favored nation clause in the shareholders agreement (if one investor negotiates a better deal, it must apply to all investors) or via a prohibition on side letters.
This is immensely helpful. Thank you for the reply!
Do you know a good resource to learn more about the legal aspects of a deal?
Having never been to law school, would expect a contracts course would be helpful. Maybe reach out to some lawyers to see what legal M&A texts are helpful.
Sorry to give you this answer, but from a finance professional point of view, this is knowledge that comes with experience. Most associates coming in don't know anything about legal entities, structures or contracts, and it gets picked up by being on portfolio companies, doing deals and discussing with the rest of the deal team.
As to your first question, there are endless scenarios when a shareholders agreement can be restated, but the most common reason one would be restated in connection with a buyout is because the buyout was structured as a merger and the shareholders agreement is restated at the time of merger either to replace the target’s pre-buyout shareholders agreement or equally likely to replace the pre-buyout shareholder’s agreement of the merger sub (eg the entity created by the new owners to effectuate the merger).
I had trouble following your second question, but as to your third question it depends on what the reserved matters are whether they would be covered in a side letter or an amendment to the shareholder’s agreement. In my experience if the changes are big enough to require a restatement (as opposed to an amendment) than a side letter isn’t likely to be practical. Obviously doing something in a side letter is problematic because it only binds the people who sign the side letter and can have fair dealing implications if it is disadvantageous other shareholders and isn’t disclosed.
Thank you! That was very clear. On the second point, just to clarify where I am coming from.
Lastly, do you know a good resource to learn more about the legal aspects of a deal?
Are these minority investors? If so there's probably some sort of drag along provision that would force them to accept if the controlling shareholders are going along with it.
In your situation, are the original investors (or one of the original investors) moving from a control position to a non-control position? If that's the case, presumably there are more aspects to this deal - like money coming in? Before selling a stake to the new investor, the existing shareholders should negotiate the new shareholder's agreement as part of the deal. The controlling shareholder will have purview on what the new terms are (and can drag the minority shareholders).
If there is no other deal happening, a controlling shareholder will not be able to just "tear up" a shareholder's agreement and give themselves more advantageous terms if there are any minority investor protections built into the existing agreement.
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