Enforcing Reverse Vesting Call Option Trusts under Foreign Corporate Rules
Enforcing reverse vesting option trusts requires pre-executed transfer instruments held in independent escrow to bypass foreign corporate register disputes.
Equity Drag
Meaning
A contractual right that permits a majority of shareholders to force the remaining minority shareholders to join in the sale of a company. The use of equity drag ensures that a buyer can acquire one hundred percent of the target company without being blocked by dissenting minority holders. This mechanism is typically defined in the articles of association or the shareholders agreement, governing the exit process for all equity classes.
Triggering Event
Board approval of an offer from a third party to purchase all outstanding shares initiates the process. The majority holders must notify the minority of the sale terms, which must be identical for all shares of the same class. This requirement prevents the majority from securing better terms or higher prices than those offered to the minority.
Investor Leverage
Venture capital funds demand this term to ensure they can execute a clean exit when an opportunity arises. The presence of the right increases the company’s valuation by assuring potential buyers that they will not face holdout shareholders after the closing. This control term provides the leverage needed to deliver a full acquisition.
Enforcement Security
Executed stock powers held in escrow by the company or its legal counsel provide the practical means to execute the transfer. If a minority shareholder refuses to sign the transfer deed, the company uses these powers to complete the sale on their behalf.