Equity documentation the articles of association AOA, also referred to as the articles of incorporation, certificate of incorporation and many other names depending on the jurisdiction is a mandatory agreement entered into between the portfolio company and its shareholders and is filed with the government institution post-closing. An AOA typically includes a limited amount of information that the company and its shareholders are required to disclose.
Additional shareholder rights and obligations not included in the AOA are then included in a shareholder agreement, SHA. The SHA is a private agreement that defines the relationship among all shareholders and between shareholders and the portfolio company.
An SHA is more flexible than an AOA and can include nearly any provision as a private document it often includes more sensitive agreements among shareholders. Broadly speaking AOA is defined economic rights of shareholders while SHAs define control and additional economic rights.
SHAs are legal agreements that exist when there are multiple shareholders and vary from deal to deal. Typically shareholder Agreements are drawn up by lawyers based on what each significant shareholding party is trying to ask for with regards to control and economics. The agreement will have clear guidelines with regards to decision making around key matters such as materially changing the nature of a business. It's bylaws its business plan budget creation audit changes or replacement of management teams. Shareholder agreements will also govern how the business is managed through the board nomination of directors board voting rules rights relating to economic distributions and rights relating to sale of equity stakes and dilution in some instances. Shareholder agreements might also govern and what manner the PE firm is allowed to exit the investment shareholder agreements can range from a few pages 200 of pages.
economic provisions typically found in the AOA will include the shareholding structure which will outline the different share classes normally preference and common shares where the Private Equity Firm will hold preference shares as well as common shares while management and others typically only hold common shares liquidation preference which dictates the hierarchy between share classes and the event of a default or bankruptcy dividend preference which governs the entitlement to higher and more frequent dividend payments for preference shares good lever, bad lever provisions, which determine the appropriate compensation or penalty for a resigning common Equity holder such as a management team member.
Controlled provisions typically included in the SHA will include board of director provisions, which describe the structure of the board of directors and define voting rights of shareholders a PE board. Typically consists of representatives of the PE fund, other shareholders management team members such as the CEO and CFO and independent directors. Board deadlock provisions, which govern how to deal with the resolution that fails to achieve a majority support. Mechanisms are put in place often using third-party help to resolve such situations. Share transfer restrictions, which give existing shareholders the right to purchase the shares of another shareholder if they decided to sell these rights enable existing shareholders to block sales of shares to investors not acceptable to the existing owners. Drag along/tag along provisions, which provide the majority shareholders the right to either drag another shareholder into a sale or the right for a minority shareholder to tag along with another shareholder that is selling their stake.
