Meaning
Contractual provisions in a shareholders agreement or articles of association trigger a mandatory offer to sell shares upon the occurrence of specified events. A deemed transfer typically arises from a change of control at the shareholder level, a material breach of the investment documents or the bankruptcy of a participant. These clauses ensure that the remaining equity holders can remove an undesirable party without the cooperation of the outgoing entity.
Triggering Event
Legal default or insolvency usually begins the process of involuntary divestment. The deemed transfer mechanism applies regardless of the intent of the affected party to remain on the cap table. It functions as a protective shield for the syndicate against the introduction of an unvetted third party or a competitor.
Valuation Basis
Fair market value or a formulaic discount usually dictates the price at which the exit occurs. The calculation of the strike price depends on whether the event is classified as a good leaver or a bad leaver situation. If a bad leaver event is proven, the price might be limited to the original subscription amount.
Execution Mechanism
Power of attorney grants the company or its directors the authority to sign the transfer forms on behalf of the recalcitrant shareholder. This authority prevents a single party from blocking a necessary clean up of the corporate structure. It preserves the liquidity and stability of the business during a transition of ownership.
