Shareholder Agreement Under M&A Transaction (Part 2)

Shareholder Agreement Under M&A Transaction (Part 2)

In part 1 of the article, We have talked about some of the terms of the Management Organization that Investors and Existing Shareholders often negotiate. Among M&A transactions, a shareholder agreement is widely used by shareholders for negotiation and contract conclusion in order to protect their interests. This Part mentions a number of rights that are often included in the Shareholder Agreement.   

1. Right of first refusal 

Means a clause that protects the existing shareholders; prevents the company ownership or management right from being transferred to the external investors. Accordingly, the selling shareholder, before transferring all or any portion of the company’s shares, must offer such shares to the existing shareholders. Only when the existing shareholders refuse to purchase, such shares shall be transferred to the external investors at the same price and on the same terms and conditions as those offered to the existing shareholders. 

2. Drag-along right 

In many cases, the external investor wishes to purchase all or a major portion of shares to have the right to manage and administer the company; and shareholders who hold the majority of shares (hereinafter referred to as the majority shareholders) have accepted the transfer, but many minority shareholders (hereinafter referred to as the remaining shareholders) refused to transfer. In such case, the external investor may only purchase the shares from the majority shareholders, and the transactions shall be considered valid because of failure to reach the initial target, and the majority shareholders shall face many difficulties. Thereby, the drag-along right is stipulated in the Shareholder Agreement to facilitate the completion of transactions between the majority shareholders and the external investor. 

The parties are required to clearly determine the portion of shares expected to transfer, of which the majority shareholders are allowed to request for performing the drag-along right as stipulated in the Shareholder Agreement. The majority shareholders transferring all or a portion of their shares (with the agreed portion) may request the remaining shareholders to sell their shares to the same investor. Accordingly, the remaining shareholders are forced to sell their shares to the external investor at a portion equivalent to the portion of shares expected to transfer to the total shares held by the majority shareholders. 

3. Tag-along right 

This clause allows the minority shareholders to participate in the transactions of transferring shares of majority shareholders, with the aim to protect minority shareholders. The majority shareholders, upon transferring all or a portion of their shares to the external investor, are required to notify in writing to the remaining shareholders.  The remaining shareholders may perform the tag-along right, in which the portion of shares that they are allowed to sell will be equivalent to the portion of shares expected to transfer to the total shares held by the majority shareholders. Accordingly, the external investor is forced to choose to (i) purchase all offered shares of the majority shareholders and remaining shareholders at the same price, terms and conditions (unless otherwise agreed by the parties); or (ii) not purchase shares.  

The parties are required to specify in the Shareholder Agreement the portion of shares expected to transfer, of which the remaining shareholders may request for performing the tag-along right. 

4. Call option 

Means an agreement on rights, but not obligations, that gives an investor the right to purchase a particular number of shares, from any other shareholders, at a pre-fixed price and before the occurrence of an event as prescribed in the Shareholder Agreement (usually the case of violations committed by the shareholders who are required to sell shares).  

Shareholders are required to clearly specify in the Shareholder Agreement (i) the circumstances in which the shareholders have the right to perform the call option from others (usually listing serious violations); (ii) the transfer prices or methods used to determine the transfer prices (such prices are usually lower than the market prices because the purchase request results from the breach of agreement); and (iii) the time it takes for the obligors to sell their shares to the option holders.
When the event giving rise to the call option occurs, the parties with the call option shall notify the obligors to transfer their shares at the pre-fixed price. 

5. Put option 

Means an agreement allowing shareholders, but not obligation, to sell all or a portion of their shares to other shareholders at a pre-fixed price, in case of occurrence of an event as prescribed in the Shareholder Agreement (usually the case of violations committed by the shareholders who are required to purchase shares). 

Shareholders are required to clearly specify in the Shareholder Agreement (i) the circumstances in which the shareholders have the right to perform the put option to others (usually listing serious violations); (ii) the transfer prices or methods used to determine the transfer prices (such prices are usually higher than the market prices because the sale request results from the breach of agreement); and (iii) the time it takes for the obligors to purchase their shares from the option holders. When the event giving rise to the put option occurs, the parties with the put option shall notify the obligors to receive the share transfer at the pre-fixed price.

Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to M&A Consulting, International Commercial & Trade, Business and Investment. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email info@apolatlegal.com.

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