Shareholder Rights Agreements are contracts entered into by and between the shareholders, a.k.a. investors or stockholders, of a company. These agreements are intended to protect the company and its shareholders from potentially coercive takeover practices or takeover bids that are inconsistent with the interests of the company and its shareholders. Most often, the shareholders agree not to sell their securities before a specified time, or to a specified person or entity, without the consent of the others. Other typical provisions of such an agreement are:
1. Company Registration. This provision gives the shareholders the right to know when the company has registered any of its equity securities, which could take place pursuant to an employee benefit plan. When registration occurs, the shareholders usually reserve the right to request that their shares are registered as well. At the same time, the company may want to reserve the right to terminate or withdraw any registration initiated by it, whether or not any holder has elected to include securities in such registration.
2. Restriction on transfers. Typically, the agreement will require each holder of restricted securities to give written notice to the company of their intention to effect a sale, assignment, transfer or pledge of their securities prior to doing so. The company may require that each request be accompanied by a written opinion of legal counsel or a “no action” letter from the Securities Exchange Commission (”SEC”) to the effect that the transfer of the securities without registration will not result in action taken by the SEC.
3. Exception for Partnerships. The agreement may also state that this restriction on transfers shall not prohibit a partnership or limited liability company from distributing restricted securities solely to its affiliates, partners, or members, when it does so without consideration. This means that if a partnership or LLC wants to “give” its members securities, it shall be allowed to do so without complying with the restriction provisions of the agreement.
4. Indemnification. The shareholders will usually want the company to indemnify each holder with respect to registration or compliance with the Agreement against all expenses, claims, losses, damages or liabilities arising out of any false statement of a material fact contained in any registration statement, prospectus, offering circular or any amendment thereto. Essentially, the shareholders do not want to take responsibility for the company making a false statement about their business that might raise the attention of the SEC.
The agreement may also include less critical, but still important, provisions in respect to transfer of registration rights, termination of rights, third parties, governing law, executing the agreement in counterparts, notice, severability, amendments and waiver, and attorney’s fees. Finally, an authorized representative of each and every shareholder as well as the company’s CEO or CFO must sign the agreement.
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