Legal (non)sense in shareholders’ agreements

Brussels – 13 December 2012

Programme

I. Rationale

II. Structure

III. Legal issues & a-typical clauses

2

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]

7

Categories of shares (1)

Shares

Ordinary shares

Preferred shares

Cum prefs

Shares without voting rights

Bonds

Convertible bonds

Profit sharing certificates

8

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 !

12

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

Anti-dilution (2)

Ratchets

Legal implementation

Call options

No issue of new shares

Warrants

Limited in time

Convertible shares

Recent technique

14

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

17

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

19

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

21

Conflicts (2)

Shoot out clauses

Russian roulette

Texas shoot-out

Dutch auction

22

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

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

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

26

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

28

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Q&A