How to identify key issues in a target company's shareholders' deed
If you're advising a buyer on the acquisition of a company (or some of the shares of a company), you might be required to review the target company's "shareholders' deed" as part of the buyer's due diligence. If this is the case, we recommend starting with our checklist (free to download here). The checklist covers how to review key provisions such as share transfer restrictions, voting rights, board composition, and exit mechanisms.
Download a review template for a shareholders' deed here to get started
During the actual review process, you may need to adapt or expand the checklist to address any additional considerations or specific requirements of the proposed transaction.
Parties
- Identify all the shareholders listed as parties to the agreement. The target company may also be a party.
- Determine if the buyer or any of its affiliates is already a party to the agreement.
Board representation
- Note the shareholders who have the right to appoint a director/s to the board.
- Check the number of directors each shareholder can appoint.
- Assess if the buyer will have adequate representation on the board after the acquisition. This allows the shareholder's appointed director to vote on board decisions.
- Understand what the voting thresholds are for certain decisions and what decisions (if any) require approval by all directors (unanimous decisions).
Share transfer restrictions
(See further details in our article dedicated to this topic)
- Carefully review the restrictions on transferring, disposing, or dealing with shares in the company. For example:
- Absolute prohibition
- Change of control restrictions or prohibition
- Director's power to refuse registration of a share transfer
- Drag along and/or tag along provisions
- Granting security interest over shares
- Lock-up period
- Obtain prior written consent (or approval) from the other shareholder(s)
- Rights of pre-emption
- Understand the exceptions to the restrictions, if any (e.g. there might be an exception for transferring shares to a related party or affiliate of the shareholder).
- Identify if the proposed transaction will trigger any of these restrictions.
- Evaluate the impact of these restrictions on the buyer's ability to acquire the desired shares.
Decision-making
(See further details in our article dedicated to this topic)
- Review the provisions related to decision-making processes within the company.
- Determine if certain decisions require unanimous shareholder approval or special majorities.
- Assess if the buyer will have sufficient voting rights or control to make critical decisions after the acquisition.
Miscellaneous
- Note the governing law of the agreement.
- Check for any other relevant provisions that are unusual or onerous for an incoming shareholder.
- Identify if the agreement has been amended or modified since its execution. Review any amendments or modifications to understand their impact.
- Cross-check the provisions in the Shareholders' Deed with other relevant documents, such as the company's articles of association, bylaws or constitution. Identify what document prevails if there are conflicts between them (e.g. inconsistency in share transfer provisions).
Assess the impact on the proposed transaction
- Assess the overall impact of the Shareholders' Deed on the proposed transaction. E.g. identify any potential restrictions that may be triggered.
- Determine if any provisions need to be amended or renegotiated to facilitate the acquisition.