The entry of a new investor or strategic partner is a significant event in a company's life and often marks an important stage in its growth.
But as always, a great opportunity also carries a tangible danger, which must be identified in advance and known how to avoid.
Allocating shares to an investor in the company or to a new partner can lead to the company's owners finding themselves 'diluted,' meaning they hold a smaller portion of the company's shares, and in practice, they are left with less control over the company they founded and are even exposed to hostile takeovers by unwanted shareholders.
One of the mechanisms intended to prevent such a scenario is the inclusion of a pre-emptive right in the company's relevant agreements, such as those. Founders' Agreement, Partnership agreement, investment agreement, share purchase agreement, or share allocation agreement.
A preemptive right is, in effect, a right granted to existing shareholders to maintain their proportional share of the company’s stock by participating in the allocation of new shares. In other words, they are given a 'right of first refusal' to decide whether they wish to purchase the new shares so that their percentage of ownership in the company’s shares is maintained (For example, a shareholder holding 10% of the company’s share capital may purchase 10% of the shares offered in the new allocation) before the company can offer them for sale to a new investor or partner. It should be noted that this is usually a right of first refusal only and not a right to purchase the shares on preferential terms.
It is important to emphasize that this is not a right that cannot be restricted. In many cases, it is customary to restrict or exclude the right of preemption in order to allow the company to achieve economic goals, such as raising capital. .
Therefore, the inclusion of an option to pre-empt and the manner in which it is drafted, in accordance with the relevant circumstances, is a material matter, which is best handled by a lawyer specializing in drafting agreements such as founders' agreements or investment agreements, who will know, based on their experience, how to exercise the appropriate discretion, in a way that will best serve the shareholders and the company.
We invite you to schedule a meeting with us to focus on your needs.
Adv. Dov Kerner 052-6371983