Top 6 Srcrets of Corporate Contracts

Corporate Contracts

A corporate contract in the realities of the present time allows you to regulate the relations of the participants. So, how to make it an effective solution, and not just another declarative document?

The main purpose of corporate contract

The legal relationship between members of a large company is rarely straightforward. In business, the interests of founders, shareholders, and partners collide. Trust between them is an essential component of success, but not the only one. The interaction of the organization’s participants must have legislative regulation, and its main instrument is a corporate agreement.

The conclusion of a corporate agreement is a reliable way to avoid protracted disputes and desperate situations when the parties cannot come to a common solution and, as a result, lose everything. The advantage of corporate contracts is that it allows you to foresee almost any subtleties of business relationships and, thus, make the business as predictable as possible, guaranteed to avoid all kinds of unpleasant surprises. Therefore, the more conditions it will include, the better.

The corporate agreement is designed to approve in writing the most painful issues of partnership like:

  • distribution of roles in business, areas of competence and responsibility;
  • lockup period – the period of prohibition of payment of dividends, withdrawal from membership, sale of shares, etc .;
  • drainage protection – participants undertake not to alienate their shares for the period of return of financial assistance to one of the participants or persons affiliated with him;
  • transfer of ownership of a share of one of the participants on fixed terms;
  • ban on voting on certain issues on the agenda.

What are the secrets of corporate contracts?

A corporate contract is an effective means of resolving any disputes and conflicts within an organization. But drawing up a document requires taking into account many nuances, a detailed analysis of the consequences for each participant.

There are the additional mechanisms that can be regulated in the shareholder contract:

  • Cash-in

It is typical for almost all rounds of investment. Plus, most often, the investor enters into a corporate agreement with the founders, which maximally protects the investor. Such a scheme is advantageous if the company’s activities are conducted by the founders, and the investor can receive dividends and only occasionally control them.

  • Cash-out

 Investing by repurchasing shares of a company from one of the participants of the company is most often used in the later stages. The new investor repurchases the share of the investor who invested at earlier stages. The downside is that the money does not go to the development of the company, but only to the current participant. But the positive point is that the number of company owners is not increasing and the management structure is not complicated.

  • Drag-along right

It is a provision or clause of the agreement that gives the majority shareholder the right to force minority shareholders to join the sale of the company. The majority owner who engages in “dragging” must provide a shareholder with the same price, time frame, and conditions as any other seller. Providing drag-along rights is important for the sales of many companies, as buyers often seek complete control of the company. It helps to eliminate the current minorities and sell 100% of the company’s securities to a potential buyer.

In the event of a deadlock, when the necessary commercial decision cannot be made due to the lack of agreement between shareholders on any issue, it is recommended to find an independent mechanism, a third party, otherwise, the business will have to be liquidated or sold.