Introduction About the Rights Agreement
A rights agreement is a legal document that is signed by a company and its shareholders as an arrangement of anti-takeover, which is anticipated by the company. To make this agreement, the company generally appoints a rights agent who issues the certificates of rights to the shareholders at the time of attempting a takeover.
What Is the Rights Agreement?
A rights agreement is an anti-takeover arrangement that is signed between a company and its shareholders with anticipation of the future takeover. The shareholders can exercise their rights to receive additional stocks, shares, or debentures if they have an agreement with them.
Who Takes a Rights Agreement?
This agreement is taken by a shareholder of a company by the rights agent appointed by the company.
What Is the Purpose of a Rights Agreement?
The basic purpose of the agreement is to provide a legal right to the shareholders of a company to receive the shares, stocks, and debentures in the future. Apart from that, the company makes this agreement to make suitable arrangements for anti-takeover.
Contents of a Rights Agreement
The following are the contents of an agreement;
- The name and address of the company and shareholders
- Date of execution of the agreement
- The validity of the agreement (duration)
- Methods of termination of the agreement in case of breach agreement
- A preamble with the identification of the parties involved i.e., the company and its shareholders
- List of recital including the goals and rationale of the agreement
- Details of the optional and mandatory buyback of shares by the company in case the shareholder gives up.
- Rights regarding the refusal clause.
- Obligations of the company:
- Filing of SEC registration statement with regards to registrable securities
- Filing amendments to the registration
- Notification of such registrations to stockholders
- Commercial efforts to register and qualify the securities covered under such a registration.
- Providing a transfer agent and registrar for the Registrable Securities
- Covenants:
- Delivery of financial statements that specify that delivery of income statements for each fiscal year to each financial investor, statements of cash flows for the estimated period and so on.
- Issuance of an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity, in case of any event, within 120 days after the end of each fiscal year of the Company
- An unaudited profit or loss statement, a statement of cash flows, in any event within 45 days at the end of the first three quarters of each fiscal year of the Company
- A budget and business plan for the next fiscal year (prepared monthly basis) and other updated or revised budgets (if any)
- Delivery of financial statements that specify that delivery of income statements for each fiscal year to each financial investor, statements of cash flows for the estimated period and so on.
- Details of the “Right to purchase the securities of a shareholder
- A description of the potential insurance policy
- Details of fair prices of shares calculated annually with a formula
How to Draft a Rights Agreement?
The drafting process of an agreement is mentioned below;
- The name and address of the company and shareholders
- Date of execution of the agreement
- The validity of the agreement (duration)
- Methods of termination of the agreement in case of breach agreement
- A preamble with the identification of the parties involved i.e., the company and its shareholders
- The goals and rationale of the agreement
- Details of fair prices of shares calculated annually with a formula
- The remedies and penalties applicable in case of breach of agreement
The negotiation strategy in such agreements is not an agreement made by the company for the anti-takeover arrangement. However, negotiation is possible, but the chances of negotiation on the part of the shareholders are very rare.
Benefits and Drawbacks of a Rights Agreement
Benefits: The agreement aims to provide a legal right to the shareholders of a company to receive the shares, stocks, and debentures in the future. Apart from that, the company makes this agreement to make a suitable arrangement for anti-takeover.
Drawbacks: However, it can make the company more cost-competitive for acquisition as a result of the additional debts and outstanding shares.
[ Also Read: Patent License Agreement ]
What Happens in Case of Violation?
In case of violation of the agreement on the part of the shareholder, he loses the right to receive the shares, stocks, debentures of the company as the company may terminate the contract. In case the company violates the agreement, the shareholder can sue the company and claim the losses suffered due to a breach of the agreement.
Today, the rights agreement is being made by the company for its shareholders by appointing a rights agent who issues the certificates of rights to the shareholders at the time of attempting a takeover.
To sum it, it provides rights to the shareholders to receive shares and stocks.
Sample Rights Agreement
A sample of the agreement can be downloaded from below.
