M&A in family-owned companies: Exit Rights and Transfer Restrictions

Exit rights are an important part of a shareholders’ agreement, which was analyzed in greater depth in the previous article “M&A in family-owned companies: Shareholders’ Agreement”. Its relevance lies in the fact that they ease shareholders to leave the company in case they decide it. Thus, from the professional investor’s point of view, exit rights are useful when they need to liquidate their positions within a certain investment period. On the other hand, from the family’s point of view it becomes important to secure these rights for their long-term plans and to have some protection in case things do not go as expected.

It is common for parties to opt for two types of rights: drag-along and tag-along. The drag-along right is the mechanism focused on protecting the interests of majority shareholders. It allows minority shareholders to be required to dispose of their shareholding when buyers seek to acquire all of the company’s shares. On the other hand, the tag-along right protects the interests of the minority shareholders by allowing them to dispose of their participation in the company when a majority shareholder decides to dispose of his participation. What is sought is that the minority shareholder may join the transaction under the same conditions as the majority shareholder.

As can be seen from the above, the mergers and acquisitions specialist must be very meticulous in drafting the clauses establishing such rights in the agreement, since they also involve the participation of third parties. On the other hand, there are transfer restrictions.

These are useful to provide shareholders with control over the composition of the owners of the business. For example, the terms under which the shares will be sold in the market and the type of investors that will be allowed into the business, among others. Regarding this last point, it is increasingly common to find transfer restrictions that focus on this. The reason has to do with the increase of corruption and, consequently, the increase of anti-corruption and anti-money laundering regulations. This is why, in addition, the parties will be able to establish the activation of exit mechanisms in case the other party becomes subject to this type of conduct. The point will be to avoid getting involved in any other party’s controversy.

Finally, the mergers and acquisitions specialist should advise the parties as to the enforceability and scope of this type of clauses in each jurisdiction, as well as the possible remedies in case of non-compliance. This is due to the fact that, for example, in Colombia, this varies among the type of companies and the compliance with certain requirements.


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