factors within and outside the business. Even though no-one could have foreseen exactly why it would be needed at the time, giving management a power to lower the trigger price if it saw fit would have been a sensible precaution.
Reducing the fixed price in a drag by amending the company’s articles is a more difficult proposition than an amendment like the one made by OfferDrag. As the price is lowered, the investor’s power to drag the other shareholders increases. A shareholder who did not vote for the changes (and is aggrieved at getting dragged at a lower price) may argue that the new drag amounts to the majority forcibly selling the shares of the minority. This becomes more persuasive if a buyer at the new, lower price has been identified and this is what has prompted the changes to the articles. A well-advised buyer in this situation will likely insist on every shareholder voting in favour of the new drag, which is time-consuming and expensive and may not be achievable.
Planning and Preparation As a general rule, at the time of an investment round the investor will ask for changes to the company’s articles. This is the time to get the drag correct, or to revisit and polish up an existing drag – the revisions to the articles will be part of a package deal, along with an investment that the company needs, so the existing shareholders can see that accepting or
28 entrepreneurcountry
amending a drag obligation is simply part of the commercial reality of accepting an external investment.
Of course it will not be possible to contemplate every circumstance (particularly the external circumstances) in which the drag might need to operate, but as shown in the FixedPrice example it is always worth considering whether any hard numbers that are specified should be subject to revision – and by whom.
Another common problem area for drag rights is that they are often drafted on the assumption that “the investors” or “the management” will always be groups with common interests. If an investor syndicates its investment, or a member of the management is replaced, or if either simply changes their plans for the company, then drag rights which rely on these groups voting together will become useless.
LotsaOptions Ltd. The stakeholders in LotsaOptions (or their advisers) gave a lot of thought to its drag. LotsaOptions had a good number of employees, and an option scheme to incentivise them. The option scheme had been set up by its accountants firm and, as is common, it contained a provision that if there was a sale of LotsaOptions then all of the options would become exercisable for a period of one year, and then lapse.
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