Advanced Corporate Practice PS04 26 October 2017

I. Key Differences between a Shareholders Agreement and Joint Venture

Company (JVC)s Constitution

Joint Venture/Shareholders Agreement

Shareholders agreement is also called the joint venture agreement (JVA)
The shareholders agreement embodies terms reflected/to be reflected in the JVCs constitutional documents
o For tax/other reasons, the actual shareholder in the JV/shareholders agreement may not be the
ultimate parent company but a subsidiary if so, the parent company is not bound by the
JV/shareholders agreement
o There should be a separate agreement/undertaking by the parent company to observe confidentiality,
non-compete obligations and guarantee of performance by the subsidiaries
o Alternatively, the parent companies can enter into the JV/shareholders agreement, but agree to transfer
the shares to the subsidiaries, and guarantee performance by the subsidiaries
Supplements the relevant constitutional documents of the JVC
Purpose: To establish the rights and obligations of the parties in relation to the joint venture, to ensure that the
company and its business is established in accordance with the parties objectives and to set out procedures
for dealing with any difficulties which may arise
Key Matters Covered
o Business of the joint venture
o Composition of the board and management arrangements
o Share capital and funding of the JVC
o Distribution of profits
o Restrictive covenants
o Protection of minority and majority interests (if applicable)
o Resolution of deadlocks
o Transfer of shares
o Termination
Board and Management Arrangements
o The JVA will usually allow each joint venture party to appoint a certain number of directors to the board
of the JVC. For example, in a 50/50 joint venture, the agreement will usually provide for the parties to
have the right to appoint an equal number of directors to the board, whilst in a majority/minority situation,
the majority shareholder will usually be permitted to appoint more directors to the JVC's board than the
minority shareholder. The right to appoint directors with specific roles, such as a chairman and the
executive directors, should also be considered.
o The JVA will also set out the scope of the board's decision-making powers and may provide for certain
important or sensitive decisions to be reserved to the board and/or the shareholders.
o Furthermore, the agreement will usually set out responsibilities for the day-to-day management of the
joint venture, including responsibilities for accounting, drawing up business plans and budgets and
preparing and distributing financial information.
Decision Making Power
o It is prudent for the shareholders to agree on those decisions which will require their unanimous consent,
such as a change in the main activity of the company, the removal of a director, the issue of additional
shares and winding up the company.
o The shareholders should also identify those decisions which require a certain special majority (e.g., 75
percent). These may include the company incurring borrowings or obtaining any other financial
accommodation over a set amount, the acquisition or disposal of corporate assets, entering into any
joint venture or partnership arrangement and applying to list the company on a securities exchange.
o Further, the shareholders should identify decisions which require a simple majority. These may include
entering into leases of real property with rental payments between a certain pre-agreed range, adopting
or varying the business plan for the company, declaring or paying any dividend, and entering into any
related party contracts.
Share Capital and Subscription for Shares
o Details of each party's subscription for or acquisition of shares in the company will also be set out in the
JVA. Where the company's share capital is split into different classes of shares, the company's articles
of association will set out details of each class of shares and the JVA will usually provide for each party
to subscribe for or acquire a different class of shares.
o The JVA should also set out the consideration payable for shares in the company (whether cash, assets
or a combination).
o Details of procedures for shareholder meetings may be covered, although they may equally be dealt
with in the articles of association rather than the JVA.
Funding Arrangements and Other Contributions to the Joint Venture
o The JVA will usually set out details of the initial funding of the joint venture, which could include cash
subscriptions for shares in the JVC and/or loans provided by the shareholders or third parties.
 o In addition to initial funding requirements, the parties should consider the extent to which the source of
any future funding of the JVC should be legislated in the JVA.
o The shareholders may also make non-cash contributions to the joint venture. The parties will need to
carefully consider how any non-cash contributions are to be valued. Details regarding the provision of
non-cash contributions may be set out in separate agreements, eg asset or business transfers,
secondment agreements and intellectual property licences, rather than in the JVA itself.
o The shareholders agreement should make provision for the shareholders funding obligations in respect
of a start up company where the shareholders provide capital to cover the costs of incorporation and to
fund the companys operations in its early stages.
o Provision may also be made for funding to be provided by the shareholders in the future if required.
Distribution of Profits
o The JVA may set out the agreed method for extracting profit from the JVC. The most common method
of profit distribution is by way of dividend from the JVC and the JVA will often set out the extent to which
any distributable profits must be distributed to the shareholders and the timing of such distributions.
o Depending on the nature of the parties, interests in and contributions to the JVC, other methods of
extracting profit may be possible, eg fees for services provided to the JVC.
o Shareholders should give consideration to how any profits made by the company will be dealt with. The
distribution policy should be flexible enough to change from time to time with changes in the
circumstances of the company.
Restrictive Covenants
o If the JVA is intended to establish an ongoing business, the JVA may contain restrictive covenants
which limit the extent to which the shareholders are permitted to compete with the business of the JVC
and/or to solicit the JVC's customers, employees or suppliers.
o The competition law implications of any restrictive covenants included in the JVA should be considered
and care should be taken to ensure that such restrictions are reasonable and likely to be enforceable.
Protection of Minority Shareholders
o A minority shareholder will be particularly concerned to ensure that it has some level of control over the
conduct of the joint venture and that it is in a position to protect its investment. For example, if the
majority shareholder is able to appoint the majority of directors to the board, the minority shareholder
will be at a clear disadvantage as most board decisions can be taken by a simple majority of directors
present at the board meeting. The minority shareholder will therefore need to consider the extent of its
statutory rights and will also seek to include additional contractual protection of its position in the JVA
and/or the articles of association of the company.
o Minority shareholders will usually seek to negotiate a list of veto rights or reserved matters which require
the consent of the minority shareholders before any action can be taken. Common reserved matters
include: the issue of new shares and the creation of rights over shares; the introduction of new
shareholders; the payment of dividends and other financial matters; the entry into major transactions;
and other significant changes to the joint venture business. Matters can be reserved at either board
level or at shareholder level.
Deadlock
o A joint venture in which two joint venture parties each own 50% of the shares in the JVC is sometimes
known as a deadlocked or deadlock joint venture. Such a joint venture will be governed by the principle
that the joint venture parties must reach agreement on any step to be taken by the JVC; if they cannot
agree on a certain cause of action, the action will not be taken. As already mentioned, the structure and
management of the joint venture will usually reinforce this deadlock position. Clearly, problems will arise
if agreement cannot be reached.
o Whilst some joint venture parties prefer not to specify in the JVA how any deadlock is to be resolved,
others will require the drafting of detailed deadlock resolution procedures.
Transfer of Shares
o When deciding whether to enter into a joint venture, parties will want to consider carefully the identity
of the other proposed parties to the joint venture and the experience and resources that they will bring
to the table. They are therefore unlikely to want the other parties to be able to freely transfer their shares
in the joint venture to whoever they choose. For this reason, most joint venture agreements and/or
articles of association will contain a number of restrictions on the transfer of shares. These restrictions
could include:
permanent or temporary prohibitions on transfers of shares
a prohibition on transfers of shares to competitors
a prohibition on any shareholder transferring part of its interest
conditions which must be complied with before intra-group transfers or transfers to family
members or a family trust can be effected
pre-emption rights (or rights of first refusal) which may apply before a shareholder can transfer
its shares to a third party, and
drag-along and/or tag-along rights
a requirement for any transferee to sign a deed of adherence to the JVA
o Similar to an issue of shares, the parties often agree that no shareholder can transfer its shares without
the prior approval of some or all of the other existing shareholders. This is designed to prevent the
 introduction of a new investor to the business who does not share the same vision or objectives as the
existing shareholders. The shareholders agreement should contain prescriptive provisions dealing with
how shares in the company may be transferred by an existing shareholder.
Valuation
o One of the most common difficulties in respect of shareholdings in a company relates to the valuation
of shares in the event of an issue of new shares or a transfer of existing shares. It is vital the
shareholders consider and agree on how the price of shares will be determined in these circumstances.
The valuation methodology may involve agreement between the relevant parties, reference to an
adopted formula (e.g., based on the net assets of the company or on certain accounting principles), or
independent valuation by an appropriately qualified valuer. In some cases, shareholders may rely on a
combination of these approaches.
Termination
o When entering into a joint venture, the parties may already have views as to the circumstances in which,
and the timing when, the joint venture will terminate. For example, some parties may enter into a joint
venture to carry out a specific project, intending that the joint venture will terminate when the project
has been completed. Others may agree that the joint venture will have a fixed term, following which the
joint venture will come to an end. However, even where the parties have no explicit intentions at the
outset as to the circumstances and timing for termination of the joint venture, they should give some
consideration to the types of event which could lead a joint venture to terminate and provide in the JVA
for how such events should be dealt with.
o Common termination events include: agreement of the parties to terminate; expiry of a fixed term or
completion of a specified project; where there are two shareholders, one party selling its shares in the
JVC (exit); material breach of the JVA which has not been remedied; insolvency; change of control; and
unresolved deadlock on a key issue between the parties.
Other Provisions
o Conditions to commencement of the joint venture
o Accounting and tax matters
o Precedence of the agreement over the articles of association
o Confidentiality
o Warranties
o Boilerplate provisions

Differences
The Constitution will set out the broad provisions relating to the governance of the JVC, whilst the Shareholders
Agreement is a more specialized document tailored to the particular purposes of the Company, the nature of its
business and the wishes of its shareholders
o Can enter into a JVA even if there is no company forever, can draft a JVA as if it is a shareholders
agreement
o Can call each party a JV party, just dont call it a shareholder
o Nothing is stopping parties from coming together to operate a business/startup as if it is like a company
there is just no company incorporated
o When no company is incorporated under the laws of Singapore, then you call it a JVA (or consortium
agreement, partnership agreement)
o If commercially they intend for certain rules of CA to apply, it is for them to bring some of these
provisions in
o If you do not want CA to apply to unofficial entity, you would not bring in express terms in the CA into
the JVA
o Interchangeability issue does not matter whether the company has been incorporated or not
But can say that the agreement is subject to the successful incorporation of the company
Shareholders Agreement usually includes more prescriptive requirements relating to the operation of the
Company and controls what all shareholders would like to see in regard to the operation and management of
the Company
Shareholders Agreement bind the parties to the agreement, but does not necessarily bind future shareholders
o Governed by the ordinary rules of contract
o Incoming shareholder, whether it is by a sale, or transfer of shares, or issuance of new shares to a new
party, will only be bound by the terms, if he enters into a document which indicates that it will be similarly
bound
Deed of accession document that says that you will step into the shoes of the shareholders
that you are replacing as if you were an original party, assuming that this is a transfer situation
If it is a new issuance situation, you would have to subscribe to new shares
Constitution is regulated in all aspects by Singapore Companies Act will automatically bind all shareholders,
current or future
o Social, legal contract between shareholders and the public
o Constitution can be amended
Majority/Minority Shareholder Protection
 o Without a Shareholders Agreement, minority shareholders may be exposed to the actions of the
majority who are able to amend the companys constitution provided that they hold the requisite voting
power of 75%
o Majority shareholders may wish to ensure that the entire share capital of the company can be sold if a
bona fide purchaser for value makes an offeror all the shares the Shareholders Agreement can
include Drag Along Rights, but a standard Constitution may not include such clauses
Major difference is that a shareholders agreement is governed by the ordinary rules of contract. However, the
constitution is regulated in part by the Companies Act.
o Under the Companies Act, a constitution can be amended from time to time by a special
resolution by shareholders holding 75% or more of the voting rights.
o On the other hand, a shareholders agreement can generally only be varied with the consent of
all the parties.
o Thus, it may be preferable for shareholders (particularly those with minority shareholdings) to enter a
shareholders agreement in order to entrench certain rights, e.g. pre-emptive rights in respect of the
transfer or issue of shares.
o In the absence of a shareholders agreement, minority shareholders may be exposed to the actions of
the majority who may amend the rights of all shareholders, providing they hold 75 percent or more of
voting rights (notwithstanding that any such action may be oppressive against the minority).
o A shareholders agreement may often be preferred for particular shareholders rights as shareholders
consider it to be a more private document than the companys constitution.
A shareholders agreement is confidential between the relevant shareholders and the company whereas a
companys constitution maybe publicly available.
A shareholders agreement is typically more cost-effective and easier to enter into as it follows standard contract
law and doesnt require a special resolution to be effective and enforceable.
The shareholders of a particular class may wish to enter into a private arrangement as between themselves. It
could, therefore, be a question of practicality.
A shareholders agreement can: 1) confer a specific power to appoint a director or directors, and remove those
directors, on a particular shareholder or shareholders holding more than a specified percentage of shares; 2)
alter the usual voting power of directors, for example, by adopting voting entitlements which reflect the
proportional shareholding of the shareholder who appointed them; 3) prescribe arrangements for meetings,
including who must be present for a quorum and how often they must be held; 4) include a list of decisions
which the directors must take to shareholders, such as decisions to sell key assets or businesses, acquire
businesses, acquire assets of a specific type (e.g. land), borrow money or make certain personnel decisions
(e.g. appointing or removing a CEO): this is in addition to those decisions which the Act says directors must
take to the shareholders (changing the company name, constitution, certain share buy-backs etc.)
o A shareholders agreement can thus give shareholders more certainty regarding when, and the nature
of, decisions which directors must refer to them.
The constitution would have provisions regarding the issue and transfer of shares, and the process by which
these transactions can take place. The starting point is that the power to issue shares or approve transfers rests
with the directors, but they may also be required to offer shares to existing shareholders in proportions (known
as pre-emptive rights).
o A shareholders agreement would more specifically regulate these transactions, by
Valuation agreeing on the method of valuing shares
Succession plans providing for the transfer of shares at particular times, e.g. in order to give
effect to succession plans
Call options agreeing on which events may give rise to other shareholders having a right to
purchase the defaulting partys shares
Put options agreeing on which events may give rise to shareholders having an obligation to
buy other shareholders shares
Drag along prescribing when majority shareholders can require minority shareholders to join
in a share sale to a third party
Tag along prescribing when minority shareholders can require majority shareholders to
involve them in a share sale to a third party

II. Should the joint venture company be a party to the shareholders

agreement? (A) Advantages and disadvantages of JVC becoming a party to the
shareholders agreement; b) Ways to overcome the disadvantages)
Advantages of making the JVC a party to the JV/shareholders agreement
o Undertaking of obligations is direct
o Easier to enforce obligations, particularly if the directors have little regard for shareholders wishes, or
whether there are multiple parties to the JV (especially if there is a material risk that the directors of the
company do not observe undertakings)
o Easier to enforce obligations, especially if the joint venture/shareholders agreement embodies more
than rights qua members of the joint venture company
o Easier to enforce obligations of co-venturers in a bankruptcy situation where there is a receiver or
trustee in bankruptcy
 o Advantage of having the company is that a lot of terms in the shareholders agreement is that
Shareholder A shall procure the company to do something, or Shareholder B shall procure the company
to do something else would relate back to the original intention of getting the parties in
Disadvantages of making the JVC a party to the JV/shareholders agreement
o In the event of dispute between the parties, JVCs consent may be required
o Terms that fetter the JVCs statutory powers might be unenforceable against the JVC
o When there are disputes, parties will want to take wider relationship issues into account, without consent
of joint venture company being required
o In order to have the agreement of the company who in turn might be run by directors nominated by
shareholders in dispute, it becomes circular
o To get the agreement of the company itself, which is in turn run by a management separated by the
differing views of the managers who appointed them, it will be difficult
o Russell Northern Development Bank case
o Different class rights if shares are divided into different classes, special rights are attached to different
classes
The special rights can attach to particular shares held by minority shareholders, which will allow
minority shareholders to block company resolutions
Yes, the JVC should be made a party to the shareholders agreement, so that the shareholders can directly
enforce obligations against the company.
Goals of shareholders are to maximize profit vs goals of managers
o Director should be independent and not act in a way only to maximize profits should maximize the
best interests of the company
In this situation, it will not be uncommon for the director to be beholden, there will also be deadlock clauses etc
Contractual remedy is the last resort, fact that you have already talked about the shareholding is good enough
to warn parties to move on
o Commercial reality will not take part in a lot of negotiations in the early stages
Reserved matters instead of having 75% agreement in extraordinary general meeting, you elevate it to 85%
- this list is so heavily negotiated, there is a presupposition that parties will adhere to it
o Serves as a deterrent

III. Under what circumstances could a deadlock arise in the context of the
proposed joint venture? What are some contractual mechanisms to resolve
such deadlocks?

Circumstances under which a deadlock could arise

In 50:50 joint ventures where neither party to the joint venture has a majority and a conflict arises over the
management of the joint venture
o Shareholders of JVC are equally split between themselves on a decision requiring a majority vote
o Where parties each own 50% of the shares (or equal proportions of the shares if there are more than
two parties) of a company, if they cannot agree on a certain course of action
The structure of the company may reinforce the deadlock position, e.g. each party will be able
to appoint an equal number of directors to the board, each party will have equal voting rights
Divergence of views on certain crucial financial and administrative decisions affecting the venture may be due
to a substantially fundamental difference in commercial outlook and business objectives between the parties

Mechanisms to resolve the deadlocks

Deadlock provisions must first aim to provide a system of amicable resolution of disputes. Thereafter, it must
provide for an easy exit route to the dissenting shareholder.
Methods typically agreed on to break deadlock of varying degrees include
o Providing for a chairman to have a second vote
o Mandating a period and process for parties to seek resolution
o Escalating the issue to senior officers of the parties for resolution
o Providing for exit options with pricing mechanisms
Successful deadlock resolution procedures will encourage parties to reach an amicable and speedy settlement
of outstanding issues
When there is a deadlock, you first negotiate in good faith
o Singapore does not have provisions to determine whether a person is negotiating in good faith
o Parties then to put dispute in writing and ask people higher up to escalate the matter
o If they do reach an agreement, then the mechanism in the agreement
o Parties can additionally agree in the agreement itself that they will use their best efforts to follow an
outcome

Options available
Remedies at law in the event of an unresolved dispute between shareholders resulting in deadlock
 o Shareholders can, by special resolution (75%), vote to wind up the company. If there is an unresolved
dispute resulting in deadlock, a shareholder can also apply to the court to wind up the company. If it is
of the opinion that it is just and equitable to do so, the court can order a winding-up of the company, or
for the interests of one or more shareholders to be purchased by the company or any of the other
shareholders.
Additional vote
o Chairman can have casting vote in deadlock situation appointment of chairman may rotate.
But who gets to be chairman?
o Alternates constitution should clarify whether the director can appoint an alternate to attend and vote
in his place.
Independent directors swing vote
o Appointment of such directors have no specific allegiance to either party
o Outsiders swing vote At shareholder level, the company may issue a golden share to the outsider or
at board level ask an impartial non-executive director to make the decision. Whether the outsider is a
director or a shareholder, there are a number of considerations which must be taken into account if this
method is used, including identifying a suitable impartial person with appropriate business expertise,
the costs of referral to an outsider (i.e. what payment will the outsider require), and whether deadlock
resolution may be delayed by the time taken for the outsider to understand the issues
If you can find a candidate willing to act and acceptable to both shareholders
Does the third director resign after the deadlock is broken?
2-tier board structure there can be a supervisory board and a management board
o Supervisory board represents owners and employees
o Management board comprises of key executives
o Contrast from a 2-company structure holding and subsidiary company
o Problem with these two is the need to clarify which matter falls under whose jurisdiction
Internal escalation
o If the company is within a group and deadlocked it may be sensible for the deadlocks to be escalated
to higher levels of management within the group. Such a procedure may be effective because it will
concentrate the minds of the management team (as they will be unwilling to have to refer the matter
higher up), and managers at higher levels may be better able to appreciate the broader strategic picture.
However, this procedure is not likely to be effective where the parties have few or no levels of
management above those directly involved.
Dispute review panel
Reference to mediation, arbitration or expert determination
o Referring a dispute to an external expert or arbitrator could unlock deadlocks at either board or
shareholder level. However, such referrals may involve considerable time and expense and may not be
appropriate where the deadlock arises for a business rather than an operational reason. Mediation may
be used to assist the parties to resolve the deadlock themselves but will not provide a final resolution if
the parties are unable to agree on a solution to the deadlock. If the parties are unable to agree on the
resolution of a deadlock and none of the above methods are effective, options will usually be limited to
a transfer of shares or voluntary liquidation of the company.
A good solution if the parties approach it in good faith and intending to compromise, as a
mediator has no power to impose a solution on the parties
Transfer of shares
o Russian roulette provision
A typical Russian roulette provision works by one party (A) offering to buy the other party's (B's)
interest in the joint venture at a price specified by A. B has a limited period of time to sell its
interest at that price or, if it does not want to sell its interest, to purchase A's interest at the
same price. If B does not respond within the specified time, B may be deemed to have accepted
A's offer to buy its shares. Such provisions are designed to ensure that the price paid for the
transfer of shares is fair and that the parties only resort to the use of the procedure if they are
unable to continue to work together.
However, the arrangements are likely to favour the party that is financially stronger,
who can afford to buy out the other shareholder or more involved in the business.
o Mexican or Texas shoot-out
This usually involves one party (A) offering to buy the other party's (B's) shares at a price
specified by A. B is then entitled either to accept A's offer or to reject A's offer and state that it
wishes to buy A's shares at a price higher than that specified by A. A and B then make sealed
bids or enter into an auction, and the person who bids the highest is entitled to buy the other
out. This procedure is subject to the same objections as Russian roulette procedures but is
also more open to exploitation, as a party who does not really want to buy the other party out
could force the other party into paying a higher price than it initially offered. If neither party is in
a position to buy out the other party, the parties may attempt to sell the whole company to a
third party, failing which the company may enter into voluntary liquidation. However, in a multi-
party agreement, it may be possible for one of the shareholders to transfer its shares and exit
without affecting the ongoing operation between the other parties.
 o Fairest (highest) sealed bid under which both shareholders must make a sealed offer to buy the shares
of the other shareholder, which offers are given to a third party who decides which offer price is the
fairest and must be accepted the loser selling to the winner
A solution that also favours the financially stronger shareholder
Statutorily, under s 254(1)(i) of the Companies Act, parties may be able to apply for a just and equitable winding-
up where there is a deadlock without contractual mechanisms to unstuck the parties
o Factors that objectively show when it is just and equitable to wind up include:
Irretrievable breakdown this is usually the reason to resolve procedural deadlocks
Loss of substratum where the JVC can no longer achieve its objectives
Voluntary liquidation
o Voluntary liquidation of the company will usually be a last resort where none of the parties are in a
position to buy the others out and the parties are unable to effect a trade sale of the company to a third
party. Voluntary liquidation involves the company being wound up and selling its assets and/or
distributing them. If the company sells some or all of its assets, the shareholders may be entitled to
make bids to the liquidator for assets that they want. Alternatively, the shareholders may prefer to agree
in advance how the company's assets are to be redistributed to them if there is a surplus on liquidation.
If the company is UK registered, one or more of the parties may alternatively apply to the court for the
company to be wound up on just and equitable grounds. However, there is no certainty that the court
would determine that the grounds for such a petition had been satisfied.
o Usually with either shareholder being at liberty to bid for the assets
Transpose some of the public companys obligations, which includes having an independent director on the
board
o Independence itself must not be valid
o Submit matter to a third-party independent expert, subject to the proviso that what is being mediated is
a non-commercial issue
o If the matter is something that is commercial, it is okay for them to go down to the last stop in the road
o Other provisions will apply, e.g. transfer provisions, first right of refusal
o Strictly not a legal matter
Go to an accredited mediator does not adjudicate, parties come to an agreed solution with the help of a
mediator
o Whatever is the outcome of the mediation will be put in writing
Divorce proceedings
o Parties want to show that they are engaging in the resolution for the deadlock, but how willing are they
to agree to what the mediator says?
o When it comes to a bad situation, when either of them wants to go by force, how does the company
move on after the decision has been made?

IV. How a right of first offer and a right of first refusal would work to
restrict your clients ability to transfer its shares in the JVC; Key
differences between right of first offer and right of first refusal
Right of first refusal Holder of the right has the power to review all other offers of the party selling, and can
buy the business simply by matching the highest offer. This can allow the party remaining in the JVC to prevent
a newcomer they do not know from buying a stake in the JVC. (Soft pre-emption right)
o Considered to favour the other shareholders (not the selling shareholder)
o If there are two shareholders A and B and a right of first refusal in favour of B, then A is first required to
offer his share to third parties and obtain a price from them for this. A is then required to approach B
with the price offered by third parties. If B can match or better the price offered by third parties, A must
sell his share to B.
Right of first offer Holder of the right has the power to make the first offer to the party selling, and the party
selling can accept/reject such offer from the party remaining in the JVC. If rejected, the party selling can go find
a new 3rd party (Hard pre-emption right)
o Such a provision requires a shareholder who wishes to sell its shares to offer them to the other
shareholders through a pre-emption process but is not required to identify a third party purchaser. There
is an exclusivity period during which the selling shareholder can only negotiate with the other
shareholders before commencing third party negotiations. If an agreement to purchase such shares is
not reached, the selling shareholder can sell the shares to a third party at a price which is greater than
that offered by the other shareholders.
o If a shareholder decides to sell its share in the company, the selling shareholder must first offer its
shares to the other shareholder to whom the right of first offer is granted, who in turn may offer a price
for the shares to the selling shareholder. If satisfied by the price offered by the other shareholder or if
the selling shareholder is unable to obtain a higher price from a third party, then the selling shareholder
only has the option to sell its shares to the shareholder who has the right of first offer. However, if the
selling shareholder receives a price higher than that offered by the other shareholder from a third party,
the selling shareholder would be free to sell shares to the third party at the higher price.
o If there are two shareholders A and B, with a ROFO in favour of B granted by A and A decides to sell
his shares, then A must first offer his shares to B. Only if B refuses to purchase As shares, or if A can
 obtain a higher price for his shares from a third party than that offered by B, can A sell his share to a
third party.
o Considered to favour the selling shareholder
Would you put the pre-emption rights in the constitution?
Whenever there is an issuance of new rights, you should have the shareholders signing a waiver of these rights
Right of first offer can prevent dilution of ownership
o This clause confers a right to existing shareholders to subscribe for a new issue of shares before
outsiders can do so.
o Dilution of ownership can occurs at any new share issue. If a company has 100 shares and issues a
further 20, then a shareholder who held 40% of the shares previously would find that he held only 33%
of them after the issue. The new issue has the effect of reducing how much say he has in the running
of the expanded company.
o Right of first offer allows him to buy some of the new shares (usually up to the proportion he held before)
in preference to anyone else so that he can maintain his relative power compared to other shareholders.
Importance of right of first refusal clause
o A majority shareholder might be able to control shareholder decisions; but he might not be able to
prevent the board of directors authorising the issue of new capital and reducing his voting power as a
shareholder on matters important to him.
o A minority shareholder might be powerless to control whether a share issue happens. The effect might
be to further reduce his relative holding below the limits at which the law gives him automatic rights to
do certain things. He may find himself edged out of the company without being able to prevent it.
o In either case, the inclusion of a right of first refusal would allow the shareholder to maintain his power
o Usually, a limit is put on the number of new shares that can be bought so that a shareholder can
maintain his ownership percentage, but not strengthen his position unless another shareholder decides
not to (or cannot) exercise his right.
o The company could make it easier for shareholders to take up their right by allowing them to buy the
shares at a discount to the price external buyers would pay.

Differences between the two rights

A right of first refusal is triggered when a seller of shares subject to such right has agreed to sell the shares to
a third-party buyer. The holder of the right then has the option to purchase the shares on the same terms as
those accepted by the third-party buyer.
A right of first offer requires a seller who wishes to sell the shares to offer the right-holder to buy the shares
before it is offered to other potential buyers. If the right-holder declines the offer, the seller can sell the shares
to a third-party buyer, but only on terms no better than those offered to the right-holder.
With the first of first refusal, the buyer can wait until all other offers have been made, while with the right of first
offer, the buyer is given the option of making the first offer to purchase.

V. Contractual right to include if client wants to be able to sell its

shares in the JVC if Central Park sells its stake in the JVC
Tag-along rights should be included in the joint venture agreement option of the minority shareholder to
simultaneously sell to the third-party purchaser its minority share (right to join in any sale to a third party made
by another JVC party or at the very least, make an offer for the minority shares)
o Allows minority shareholders to tag along with a larger shareholder or group of shareholders if they
find a buyer of their shares
o Ensures that minority shareholders are not left behind in the event the majority shareholder decides to
exit the venture
This is particularly useful where there is an economic or skills base disparity between the shareholders and the
prospect of increasing/enhancing a stake is unattractive when a key shareholder has departed or where the
shareholder does not have sufficient financial resource to do so
Protects minority shareholders, who may use such rights to
o Take advantage of a favourable deal negotiated between the seller and a third party
o Attempt to prevent the controlling interest in the company being transferred to a third party
Tag along rights generally allow minority shareholders to restrict the sale of the Sellers shares to a Third Party,
in circumstances where that Third Party will also purchase a proportionate amount of the minority shareholders
shares on identical terms. If the Third Party refuses to purchase the shares of minority shareholders who have
exercised their tag along rights (Tagging Shareholders), the Seller can be restrained from selling.

Share certificate gives title, but you need it to be registered on the Register of Shares