Shareholders’ agreement: options between partners and moratorium on disposal of shares
Today we will consider important provisions of the shareholders’ agreement that help protect the interests of shareholders and ensure the stability of the company. We will talk about such mechanisms as call and put options and a moratorium on the disposal of shares.
Put Option
A Put Option is the right of a shareholder to sell his or her shares to the company or other shareholders at a predetermined price. For example, if one shareholder wants to exit the business, he or she can use a put option to sell his or her share to another shareholder at a pre-agreed price, regardless of the market value of the shares at the time of the sale.
Why is it necessary?
This mechanism is useful for shareholders wishing to exit the company under known conditions in advance, which is particularly relevant for investors.
For example, an investor will be able to sell their shares to other shareholders at a certain point (usually for the amount of their investment) and exit the company if the company fails to meet certain performance targets.
Call Option
A Call Option is the right of a company or shareholders to buy shares from other shareholders at a predetermined price. For example, if one shareholder wants to buy another shareholder's share, he or she can use a call option to buy shares at a predetermined price.
Why is it necessary?
This mechanism can also be used when structuring a relationship with an investor or partner.
For example, given the current performance of the company, the investor is willing to buy only 10% of the shares, but if the company's performance improves over the next X months, he is ready to buy another 10%. In practice, a call option can also be launched if one of the partners is a CEO and the option granted is part of his incentive program.
For options, it is important to determine the terms of activation of the option, its expiration date, the price at which the shares will be sold, and so on.
Moratorium on disposal of the shares
Another interesting mechanism for structuring relationships is a moratorium on disposal of the shares for a certain period of time.
This mechanism stipulates that shareholders will not sell their shares for a certain period of time (e.g., 3 years after the start of the business or receipt of investment). Usually such a restriction is included in a shareholders’ agreement when it is important for the parties to retain partners for the duration of a project or to prevent the departure of a key partner.
Here it is important to determine the duration of the moratorium.
To increase the effectiveness of negotiations, it is important to know and use a variety of mechanisms for structuring partnerships.
Author: Kuheika Irina
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