This post is part two of a two-part series and will focus on shareholder controls.  Here is our prior post that focused on board of director controls.

Shareholder Controls:  There are a number of mechanisms available to increase the control of one or more groups of shareholders, such as the founders or all holders of a certain series of stock (e.g., Series A Preferred shareholders).  The most common ways are set forth below.  Note that they are often used in combination.

  • Separate shareholder class voting rights (referred to as “protective provisions”) in the company’s articles of incorporation (the “Articles”) requiring approval by the holders of a particular class or series of stock for certain specified corporate actions, thereby giving those shareholders veto rights over such action being taken, even if approved by the board.
  • A requirement for approval by a larger number of shareholders than the default required by law.  This higher threshold can apply to some or all corporate actions requiring shareholder approval and typically would be included in the Articles.
  • The addition to the Articles of shareholder approval requirements for actions not ordinarily requiring a shareholder vote under the applicable corporate law.
  • The grant of contractual rights to certain shareholders to purchase some or all of the stock sold by the company in the future.  This is referred to as a preemptive right or right of first offer.  It is often placed in the investor rights agreement.
  • A prohibition on amending the Articles, bylaws and/or contracts among the shareholders unless the company obtains the approval of a certain percentage of shareholders and/or certain groupings of shareholders.
  • A contractual requirement that all shareholders agree in advance to approve certain actions under specified conditions.  The most common form of this type of provision is referred to as a “drag-along” clause.  Pursuant to a drag-along provision, the shareholders agree in advance that if a certain number of grouping of shareholders approve an action, the other shareholders will vote in favor of such action as well.