In recent times, it is common for shareholders in a corporation to execute a separate agreement from the corporation’s Articles of Association to regulate the relationship between shareholders without registering with the competent authority (“Corporation”), especially when investors are preparing to get involved in a merger and acquisition transaction. This article analyzes several provisions that can be included in the Corporation to protect the interests of minority shareholders, who own a small percentage of shares in a company and have a limited influence on controlling, governing, or making decisions regarding the company’s affairs.
See more: The protection of minority shareholders in a joint stock company
1. Put Option
A Put Option is an effective tool that provides shareholders the opportunity to withdraw their investment capital from a corporation when a serious adverse event occurs. To be more specific, a Put Option grants shareholders the right (but not an obligation) that: (i) allows that shareholder to transfer their shares to another; (ii) at a pre-determined price; (iii) upon the occurrence of an event specified in the Shareholders Agreement. This mechanism is typically outlined in a Shareholders Agreement and can be particularly useful for investors who are concerned about potential risks or instability within a company, thereby ensuring that, should the corporation’s situation deteriorate according to predefined conditions, the investor has a guaranteed path to withdraw their investment and minimize their losses.
For instance: Investor A (being a minority shareholder) when deciding to invest in corporation X is concerned about X’s financial situation and proposes to sign a Shareholder Agreement with one of X’s existing shareholders (Investor B), which stipulates that: In case X’s financial statement remains a business loss for 03 (three) consecutive years, Investor A shall be entitled to transfer all of their shares to Investor B at a pre-agreed price, and Investor B shall be obliged to receive the transfer of those shares.
2. Reserved Matters
Reserved Matters refer to a specific set of decisions or actions that require the approval of all shareholders before they can be executed. In other words, Reserved Matters are the decisions or actions that are not to be passed without the approval of all company shareholders, regardless of their ownership stake in the company. This means that minority shareholders, even if they hold a tiny percentage of the company’s shares, are still given a voice in critical corporate affairs, thereby the interests of minority shareholders can be protected.
Reserved Matters are often related to key decisions that could significantly impact the company’s business or governance. For example, Reserved Matters could include decisions such as changing the company’s name, relocating its headquarters, engaging in offshore investments, or entering into contracts exceeding a certain percentage of the corporation’s asset value.
By requiring the consent of all shareholders for specific actions, Reserved Matters help maintain balance and fairness within the company, preventing majority shareholders from unilaterally making decisions that could negatively affect the business or harm the value of minority shareholders’ investment.
3. Tag-along Right
The Tag-along Right is a protective mechanism designed to ensure that minority shareholders are treated fairly when a majority shareholder decides to sell their shares to an external party. It gives minority shareholders the right to “tag along” and sell their shares to the new buyer under the same terms and conditions as the majority shareholder.
Normally, the Tag-along Rights are provided as follows: When a major shareholder transfers their shares to a new investor (i.e., investors not being the corporation’s existing shareholders), the minority shareholder shall also have the right to sell their shares to such an investor (i) correspondingly to the proportion of shares intended to be transferred of the majority shareholder and; (ii) at a price and on terms and conditions similar to the price and terms of the majority shareholder’s transfer.
When a minority shareholder exercises the Tag-along Right, the new investor is forced to purchase shares from both the majority shareholder and the minority shareholder so that the transaction between the major shareholder and the new investor can be carried out. This provision also creates conditions for the minority shareholder to sell his shares, because as a minority shareholder, looking for a partner to buy shares may not be easy. Additionally, it is advantageous as the minority shareholder can avoid maintaining as a shareholder of the corporation when the major shareholder withdraws the capital from the company.
The Shareholders Agreement can serve various objectives, such as safeguarding, strengthening, and maintaining cooperative relationships among shareholders, outlining ways to resolve conflicts or disagreements arising during the company’s business operations, etc. Put Option, Reserved Matters, and Tag-along Right are some provisions that investors can consider including in the Shareholders Agreement, to protect the rights of minority shareholders and maintain the cooperative relationship between the shareholders as well as the development of the corporation.
Disclaimers:
This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.
For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.
Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to M&A Consulting and contact our team of lawyers in Vietnam via email info@apolatlegal.com.
