A piggyback shareholder agreement is a legal document that outlines the terms and conditions under which a minority shareholder can sell their shares to a potential buyer. It is often used in the context of venture capital investments, where multiple investors own stakes in a company but one investor is interested in selling their shares.
The purpose of a piggyback shareholder agreement is to protect the interests of all shareholders and ensure that the sale of shares doesn`t negatively impact the company or its other shareholders. It allows the other shareholders to have a say in who the new shareholder will be and at what price the shares will be sold.
So how does it work? Let`s say a minority shareholder has a buyer interested in purchasing their shares. Before the sale can take place, the shareholder must offer the other investors in the company the opportunity to purchase their shares at the same price and on the same terms as the potential buyer. This is known as a piggyback right, as the other shareholders can « piggyback » on the deal and purchase the shares if they choose to do so.
If one or more investors decides to exercise their piggyback right and purchase the shares, the sale to the potential buyer falls through. However, if no other investors are interested in purchasing the shares, the sale to the potential buyer can proceed.
There are several benefits to having a piggyback shareholder agreement in place. For one, it helps to maintain the stability of the company`s ownership structure by ensuring that any new shareholder is approved by the existing shareholders. It also provides a fair and transparent process for selling shares, which can help to avoid conflicts and disputes between shareholders.
However, there are also some drawbacks to consider. For example, the piggyback right may deter potential buyers from making an offer if they know that their offer could be trumped by existing shareholders. Additionally, the requirement to offer shares to existing shareholders first could make it more difficult for minority shareholders to sell their shares at a fair market value.
Overall, a piggyback shareholder agreement can be an effective tool for protecting the interests of all shareholders and ensuring the smooth transfer of ownership in a company. However, it is important to carefully consider the advantages and disadvantages before entering into such an agreement. Working with a legal professional with experience in this area can help ensure that the agreement is fair and effective for all parties involved.