Meaning
Contractual provision in a shareholders agreement triggers the distribution of assets as if the company had been wound up, even if it remains a going concern. This clause usually bites during a change of control, such as a merger or a sale of the majority of assets. It ensures that preferred shareholders receive their liquidation preference before common shareholders get any proceeds.
Trigger Event
Specific occurrences like a stock sale or the exclusive licensing of all intellectual property act as catalysts for the distribution. A deemed liquidation allows investors to exit their position and realize the value of their seniority. The board must follow the payment waterfall defined in the articles of incorporation.
Proceeds Distribution
Payouts follow a strict hierarchy where the initial investment amount plus any accrued dividends are paid first. Under a deemed liquidation, the remaining funds are shared among common stockholders or according to participation rights. This mechanism protects the downside for venture capital and private equity investors.
The board must verify the availability of funds before authorizing the payment.
Legal Framework
Drafting these clauses requires precision to avoid conflicts with statutory liquidation procedures. A deemed liquidation is a matter of private contract that mimics the economic outcome of a formal dissolution.
