Not having a drag is a total drag
By Matthew Literovich
It is standard day one operating procedure for a company’s Unanimous Shareholders Agreement (USA) to have a drag-along provision. It’s not something people commonly object to, as it clears an administrative hurdle if the company is ever sold.
Unfortunately, it’s also not something to which most people pay attention. Making sure everyone is bound by the drag-along is one of the major speedbumps corporate counsel frequently encounter en route to the sale of a company. People sign up to be shareholders of the company, sometimes through investments, sometimes through employment options, but if the company isn’t diligent in ensuring that these people are actually signing onto the USA, it’s not unanimous anymore – it’s really just a Shareholders Agreement (SA).
Of course, you always realize this about a week before you intend to close a transaction, maybe two or three if you have astute counsel like my colleagues at Dentons. At that point, you have four options:
- Get the undraggable shareholder to sign the USA so the shareholder can be dragged;
- Get the undraggable shareholder to sign the purchase agreement so it doesn’t matter;
- Get the undraggable shareholder to sign a power of attorney so you can complete the transaction without the shareholder’s further involvement; or
- Get the undraggable shareholder to sign an accession to the purchase agreement.
If you noticed that all of those options involve “get the undraggable shareholder to sign”, you found the major issue. If your shareholder didn’t give you authorization in advance through a mechanism, such as the USA, you’ve got to go and get it now. Instead of doing it in the ordinary course of events with all of the time in the world, you’re in a rush, you’re in a bind, and your shareholder has you over a barrel. Not ideal.
Luckily, we haven’t had a transaction implode yet due to reluctant shareholders, though I am writing this post because I have had a couple of missing shareholders cases recently that have made it top of mind. Even if you get the missing shareholder to sign on, you are absolutely adding time and legal costs to your transaction by an added last minute wrinkle.
The overall advice here? The legal ticks and ties that seem like such a headache at the time are the primary way your lawyers can save you time and money in the future. It’s our job to worry about this stuff so that you don’t have to, but in order to do so effectively, clients need to be on the same page as their lawyers in making sure that all of the right documents are signed by all of the right people. Sometimes that means an extra CA$1,000 spent now to put together record books of your investments or registers for your option plans at the time, but it can save you CA$10,000 and a good night’s sleep to not have to worry about it when you’re trying to sell your whole company five years down the line.
As a parting note, if you really can’t get someone to sign and still want to sell your company, there are other options available to us that you can ask about. But if you thought tracking down your missing shareholder was expensive and complex, it pales in comparison to the hoops we have to jump through to deal with reluctant minority shareholders in a legal and equitable fashion.