MK @ Legal Biz Leaf Right to Appoint Officers and Observers
Right to Appoint Directors and Auditors:
This clause gives an investor a right to elect directors and/or auditors.
There are few points to be aware when trying to include this provision in the Agreement.
1. Do not to give the rights to too many investors.
This is because, the more investors have the right to appoint officers, the more it would get difficult to coordinate their schedules to hold a board meeting. Also, even if a meeting is held, frequent disagreements may occur, as there are too many officers elected by varieties of investors. Therefore, this provision is generally added only when contracting with major shareholders.
2. Appoint a person who has the right to self-determine
Whether elected by investors or not, all directors need to make their own decisions at board meetings. Therefore, if an investor requests to a person from its own company to be elected a director, that person needs to be someone who has an appropriate position with certain amount of authority; and not an ordinary employee.
In this regards, in order to reduce the responsibility of such officers brought in from outside the company, a Liability Limitation Agreement is commonly concluded between the officers and the Company.
Observer rights
This clause stipulates the right to participate in board meetings as an observer. However, as observers are not equal to directors, they can only participate in the meetings and express their opinions, and cannot vote on proposals. Also, for the same reason as the right to elect officers, this right should not be granted to all investors in order to expedite the operation of the meeting.
Business Exit Cooperation Obligation
A Shareholder Agreement often include a clause stating that the company is obligated to make efforts to go public by certain mounts of year. Especially when contracting with a VC, this clause is included as it has the fund’s deadline. However, considering about the fact that not many companies are actually able to be list within the scheduled deadlines, so it is better to avoid to make this clause as an obligation coming with damages.
First Refusal Right and Tag Along Right
First Refusal Right
This is a right to preferentially purchase shares in the event that another shareholder wishes to transfer his/her shares.
Tag Along Right
The is a right to sell one’s shares jointly with another shareholder in the event that the other shareholder wishes to transfer his or her shares. This clause is particularly designed to prevent the founding shareholder from selling his/her shares and giving up management rights without investors’ permission. On the other hand, this clause usually excludes some conditions such as the transfer of shares due to the expiration of a VC fund deadline.
MK@ 11/29/2022
