MK @ Legal Biz Leaf Residual Distribution Agreement:
A Residual Distribution Agreement is an agreement that mainly stipulates the “Drag-along right ” and the “Deemed liquidation clause” in anticipation of an exit through M&A in the event that listing becomes unavoidably difficult. Since the ” Tag-along right” and “Deemed liquidation clause” are particularly important clauses, it is necessary to stipulate that it takes precedence over any other agreements or individual agreements, etc.
Parties:
Issuing company, founding shareholders, all other shareholders
*Employee shareholders or individual investors (Angels), etc., who are generally not interested in managing company itself, are often do not enter into a Shareholders’ Agreement. Thus, it is necessary to separately conclude a Residual Distribution Agreement with such shareholders in order to prepare advance for a occasion such as M&A. In other words, in situation of executing Shareholders’ Agreements with all investors, it is possible to include all the contents of the Residual Distribution Agreement thereinto.
Drag Along Right
This is a right to demand other shareholders to agree to the sale of their shares, if the company satisfies an certain conditions, such as “when two-thirds of the Class XXX Preferred Shareholders agreed to the sale of the company”. By stipulating this provision, it is possible to facilitate M&A process.
Initiator of a right: Founding shareholders or investors
Purchaser: It is possible for CV or CVC to have a right of preferential negotiating rights.
Triggering conditions:
A condition to trigger the right can be stipulated in advance such as follows.
Term Condition: It stipulates that the right can be invoked upon the arrival of a certain period of time, for example, when the VC’s fund period expires.
Amount Condition: It stipulates that the right can be invoked when the company’s value excesses a certain amount.
Deemed Liquidation Clause
The preferential Residual Assets Distribution Rights stipulated in the Articles of Incorporation at the time of issuance of preferred class shares are only become effective when the company is actually liquidated in accordance with the provisions of the Companies Act. Therefore, generally Deemed Liquidation Clause is stipulated in the Agreement to apply such provision in the event of an M&A transaction as well.
MK@ 12/03/2022
