Harmonizing Offshore Liquidation Preference Clauses with Registered Onshore Articles
Cross border venture structures require contractual true up mechanisms to harmonize offshore liquidation waterfalls with statutory onshore capital rules.
Secondary Transaction
Meaning
Transactions involving the sale of existing shares from one investor to another do not raise new capital for the issuing corporation. Market participants execute a secondary transaction to provide liquidity to early-stage investors, employees or founders before a formal initial public offering or trade sale occurs. This transfer shifts ownership without altering the cash position on the company balance sheet.
Transfer Procedure
The seller must navigate the company bylaws and shareholder agreements to obtain the necessary consents before executing the transfer. When conducting a secondary transaction, the board of directors must approve the share transfer and waive any rights of first refusal held by existing investors. This process protects the cap table from unwanted third parties and ensures compliance with securities regulations.
Once approved, the company registers the new shareholder in its share ledger, finalizing the transfer of ownership and voting rights.
Pricing Method
Market demand and the most recent primary funding round determine the share price in these private sales. In a secondary transaction, shares typically trade at a discount to the primary valuation due to their illiquid nature and the lack of voting power compared to preferred shares. The parties negotiate the discount based on the company’s financial health and market conditions.
Investor Right
Co-sale rights allow other shareholders to participate in the sale under the same terms. A secondary transaction must respect these tag-along rights to prevent founders from exiting early without the remaining investors. This mechanism ensures fair treatment across the shareholder base.