Shareholders agreement with a US company? Key points to consider

June 6, 2012

This article was written for and first featured in Financial Times

I founded a technology company a year ago, after creating a new smartphone app. My company has since produced a number of successful apps and I have now been approached by a larger, US-based company, which would like to purchase my business. Its owners say they want to keep the UK office open with me as the managing director. But I am concerned that I will have no guarantee of this, as I will no longer have a controlling stake after the acquisition. Can I insist that the continued operation of the UK office is a term of the acquisition?

Yes, you can insist on the continued operation of the UK office. But you need to be aware of the consequences if the US company breaches this provision.

If the minority protections are properly drafted, and UK law applies, any breach by the US company would be actionable in the English courts. You might also seek a contractual right for your remaining shareholding to be acquired on favourable terms.

Many other protections should be considered through a shareholders’ agreement. If the US-based company decides to sell its interest in the UK operation, you should have the right to sell your shares on the same terms – including price. Future funding of the UK business should also be made clear to ensure it is properly financed without recourse to you.

Ideally, you do not want to see the US parent group competing directly with the UK business. You need various rights of veto in a shareholders’ agreement to protect your economic interest plus rights to financial information, a seat on the board and – ultimately – the right to force the US-based company to buy your shares at some future point so that you have an exit mechanism. In addition, you need to know whether there will be a predetermined dividend policy to guarantee you an income on your investment.

Before embarking on a possible partial sale, you must also consider how well you know the US-based company; what due diligence has been undertaken on the proposed purchaser; and whether a joint venture with the US-based company may be possible instead.

 


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