Protective provisions and consent rights (class rights)

By Simon Walker

The venture capital investors in an investment round normally require that certain actions cannot be taken by the company without the consent of the holders of a majority (or other specific percentage) of their class or series of shares (investor majority). Sometimes these consent rights are split between consent of an investor majority, consent of the investor director(s) or consent of the board. Typically what requires investor majority consent and what requires investor director consent would relate to major changes in the company, such as those set out in the paragraph below, whereas operational matters that need more urgent consideration by the board would be left for board consent. Alternatively, each of the largest investors may have specific consent rights. The purpose of these rights is to protect the investors from the company taking actions that may adversely affect the value of their investment.

The types of actions covered include (among many others) changes to share classes and share rights, changes to the company’s capital structure, the issuance of new shares, mergers and acquisitions, the sale of major assets, winding up or liquidating the company, declaring dividends, incurring debts above a certain amount, appointing key members of the management team and materially changing the company’s business plan. These shareholder rights are particularly important for investors who do not appoint a director to the board of directors.

Note that in some continental European jurisdictions, local company law requires that some of the actions covered by these consent rights remain the unfettered right of the board of directors to decide. In such cases, the articles of association of the company will usually require that the level of majority needed for a board decision concerning these actions include the agreement of an appropriate number of the directors appointed by the investors…

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