Eff Effective Shareholders Agreements i Sh h ld A Crafting - PowerPoint PPT Presentation

Presenting a live 90 ‐ minute webinar with interactive Q&A Eff Effective Shareholders Agreements i Sh h ld A Crafting Enforceable Provisions on Board Composition, Corporate Opportunities, Voting Rights, Transfer Restrictions and More WEDNES DAY, JUNE 15, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Nancy L. S anborn, Partner, Davis Polk & Wardwell , New Y ork tephen Bigler, Director and President, Richards Layton & Finger , Wilmington, Del. C. S Nancy S chmidt Roush, Partner, Lathrop & Gage , Kansas City, Mo. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Effective Shareholders Agreements June 15, 2011 June 15 2011 Faculty: C. Stephen Bigler Nancy Roush Nancy L. Sanborn Partner Partner Partner Richards, Layton and Finger, P.A. Lathrop & Gage LLP Richards Layton and Finger PA Lathrop & Gage LLP Davis Polk & Wardwell LLP Davis Polk & Wardwell LLP 302.651.7724 816.460.5820 212.450.4955 bigler@rlf.com nroush@lathropgage.com nancy.sanborn@davispolk.com Any tax information contained in this presentation is not intended or written to be used, and cannot be used, to avoid penalties that may be asserted under the Internal Revenue Code or to promote, market or recommend any transaction or matter addressed herein.

Purpose and Use of Shareholders Agreements Our general assumptions:  P i  Private company t  Multiple shareholders who may be individuals, corporations, investment funds or other entities  Agreement among shareholders to give some or all of the shareholders certain rights and/or obligations that are above and beyond those given shareholders generally under state law g y g g y  Discussion will generally address Delaware, Missouri and New York state laws but most of these legal principles are the same or similar in other states 6

Purpose and Use of Shareholders Agreements Key provisions to be discussed:  B  Board of directors d f di t  Corporate opportunities  Transfer restrictions  Resolving deadlock Resolving deadlock  Special approval (“veto”) rights  Information rights  Preemptive rights  Amendments  Termination  Dispute resolution  Governing law 7

Board of Directors Shareholders want to ensure that composition of board will be as agreed  Agreement must address both nomination and voting ( e.g., shareholders do not have rights to  A t t dd b th i ti d ti ( h h ld d t h i ht t “designate”, “name” or “appoint” directors)  Nomination process typically addressed in bylaws  Bylaws should be consistent with shareholders agreement  Voting agreement is generally enforceable if in writing and signed by the subject shareholders  Agreement may address substance (how each shareholder must vote) or a procedure for determining how each shareholder must vote (e.g., as determined by a particular shareholder or group of shareholders)  State law (not Delaware) may require limit on term of voting agreement ( ) y g g  Need sufficient shareholders to be party  Is one shareholder enough?  Proxy may be required for specific enforcement of voting obligations 8

Board of Directors (cont.) Shareholders agreement should address who can remove directors and fill vacancies to ensure that board composition continues as agreed that board composition continues as agreed  State law may require these rights to be stated in certificate of incorporation or bylaws Shareholders agreement should address how board composition may change over time Sh h ld t h ld dd h b d iti h ti  If shareholders transfer shares, at what point do they lose director rights?  Are director rights transferable to a transferee of shares?  When should director rights terminate? IPO, earlier or later? When should director rights terminate? IPO, earlier or later? 9

Board of Directors (cont.) Directors owe fiduciary duties and confidentiality obligations to the corporation  Director may be faced with duties to the corporation that conflict with the interests of the shareholder  Di t b f d ith d ti t th ti th t fli t ith th i t t f th h h ld who exercised its right to nominate the director Directors are subject to corporate opportunities doctrine Directors are subject to “corporate opportunities doctrine”  Del. G.C.L. §122(17) allows Delaware corporation to renounce any interest or expectancy in business opportunities prospectively  Statute requires renunciation in certificate of incorporation or action of board of directors  P Provision in shareholders agreement is sufficient only if corporation is a party i i i h h ld i ffi i l if i i  Enforceability of waivers of corporate opportunities doctrine in other states uncertain 10

Board of Directors (cont.) Indemnification of directors  Certificate of incorporation or bylaws vs. separate agreements with directors  C tifi t f i ti b l t t ith di t  Future amendments should not limit or alter indemnification rights retroactively  Multiple indemnitors may be equally liable unless shareholders agreement (or certificate or incorporation or bylaws) establishes which indemnitors are primarily vs. secondarily liable p y ) p y y 11

Transfer Restrictions Enforceability of transfer restrictions in shareholders agreements  Historically, restraints on alienation have been invalid as contrary to public policy  Hi t i ll t i t li ti h b i lid t t bli li  Now, reasonable restrictions on transfer should be enforceable  Must be in writing and shareholders must have notice  Share certificates must be legended for restriction to be binding on transferee  Certificate of incorporation versus bylaws versus shareholders agreement 12

Transfer Restrictions (cont.) Unreasonable restrictions on transfer likely to be held unenforceable  Absolute restraint or restriction that effectively prohibits transfer  Ab l t t i t t i ti th t ff ti l hibit t f  Provision giving corporation or other shareholders right to repurchase shares on terms that deviate significantly from market  Prohibited shareholder did not have notice of the restrictions 13

Transfer Restrictions (cont.) Reasonable restrictions on transfers should be enforceable  I  Include: l d  To preserve S election or other tax characteristics  Comply with securities or other laws  Preserve ownership by professionals, or employees, or family members  Prevent competitors from acquiring shares to gain access to competitively sensitive information  Must serve valid corporate purpose, be reasonable and in accord with public policy 14