taking in investments - key considerations
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Taking in Investment - Key Considerations
When taking in an equity investment it is important that you carefully consider the impact this will have
on you, any other shareholders and the Company. This will involve some consideration of the company’s
constitutional documentation (i.e. its articles of association and any shareholders’ agreements in
place). There are many issues to consider, below are some of them:
Share Transfers
Without appropriate constitutional protections there is a risk that the potential investor may sell on
his shares to a third party whether or not you consent. You should make sure any investor is obliged
to offer his shares for sale to the company, you and any other shareholders on a pro-rata basis
before being able to transfer his shares on to any third party. Further, you might like you consider
whether there are any circumstances where the investor should be obliged to transfer their shares.
So for example what should happen if your investor dies, is made bankrupt or perhaps goes to work
for or invests into one of the company’s competitors?
Drag & Tag
Drag provisions ensure that where majority shareholders want to sell their shares in a company
they can force a minority shareholder to also sell their shares. Tag provisions ensure that a minority
shareholder can force a third party to buy their shares where they have offered to purchase a
majority interest. Where there are minority shareholdings in a company, you should ensure that
minority shareholders can be ‘dragged’. Without such provisions you may find a minority
shareholder is able to block a company sale and restrict your ability to exit the company.
Restrictive Covenants & Confidentiality
Whilst a shareholder is generally not entitled to information about a company’s affairs (other than
annual accounts), if your investor is likely to be given further information or is to become a director
of the company you may consider putting in place appropriate restrictive covenants and
confidentiality clauses. These can restrict the investor’s ability to divulge confidential information,
compete with the company and poach customers and key employees.
Control at Board & Shareholder Level
Generally it is a company’s board of directors (acting in a majority) that make decisions for and on
behalf of a company. However some matters are reserved for shareholder decision, with
shareholders acting in a simple majority or majority of 75%. So for example if a simple majority of
shareholders follow due process they can remove a director from office. Therefore it is important
that you take advice and draw up appropriate protections if investment will mean you will lose
control of the board or you will no longer have a majority of the shares in issue.
For more information please contact Rebecca Diebner at [email protected]
OTB EVELING
CORPORATE