Drafting Voting Control Thresholds in Commercial Supply Contracts
Drafting voting control thresholds requires explicit percentage triggers, strict quorum rules, and clear deadlocks to prevent minority supply blockage.
Call Option Trigger
Meaning
A contract provision specifies the exact conditions under which an investor or company has the right to force a shareholder to sell their equity. This event, known as a call option trigger, allows the option holder to buy back shares at a predetermined time or upon the occurrence of a specific performance milestone. Startups often use this structure to regain equity from founders who depart early or fail to meet their operational obligations.
Activation Event
Execution of the option occurs upon the happening of specific corporate or personal events defined in the shareholder agreement. Common scenarios include the termination of an executive for cause, a material breach of the corporate bylaws, or the failure of the company to meet its annual financial milestones. Once the specified boundary is crossed, the option holder receives a fixed window of time to deliver an exercise notice to the shareholder.
Failure to deliver this notice within the allotted timeframe results in the forfeiture of the right for that specific event.
Pricing Formula
Determining the purchase price of the shares depends on the nature of the triggering event. If the option is activated by a termination for cause, the purchase price is often set at the lower of fair market value or book value. For milestone-based triggers, the contract usually specifies a formula based on a multiple of earnings or a discount to the most recent funding round valuation.
These formulas prevent disputes by removing subjective valuation processes from the transaction.
Contractual Impact
Shareholder register adjustment occurs immediately after the purchase price is paid to the departing shareholder. This protection secures the equity pool of the company, ensuring that inactive or hostile parties do not retain voting rights or economic upside. Investors gain valuable protection through these clauses by ensuring that the equity remains in the hands of the active management team.
It provides a structured path for orderly equity transitions during periods of corporate change.