Purchase rights fundamental transactions: Overview, definition, and example
What are purchase rights fundamental transactions?
Purchase rights fundamental transactions refer to the rights granted to a shareholder or investor that allow them to maintain their ownership stake in a company during significant corporate events or transactions. These transactions often include mergers, acquisitions, or sales of a substantial portion of the company’s assets. Purchase rights in these situations, often referred to as "preemptive rights" or "anti-dilution rights," allow existing shareholders to purchase additional shares to preserve their percentage of ownership if new shares are issued or if the company is involved in a major transaction.
In simpler terms, these rights give investors the ability to buy more shares to maintain their ownership percentage if the company undergoes significant changes, like a merger or sale.
Why are purchase rights fundamental transactions important?
Purchase rights in fundamental transactions are important because they help protect investors from losing control or dilution of their stake in the company. Without these rights, a company could issue new shares or undergo a significant corporate event that results in an investor’s ownership percentage being reduced. By granting purchase rights, companies ensure that existing investors have the opportunity to maintain their proportionate ownership and continue to have a say in the company’s future direction.
For SMB owners, understanding purchase rights in fundamental transactions is essential when structuring deals, offering stock, or planning for significant corporate changes. These rights can be a key feature in agreements with investors to maintain trust and protect their interests.
Understanding purchase rights fundamental transactions through an example
Imagine your company is in the process of being acquired by a larger corporation. As part of the acquisition, the larger corporation offers to buy out your company’s stock. However, as a shareholder, you have purchase rights that allow you to buy additional shares in the newly merged entity to maintain your ownership percentage. This ensures that, even though the company is undergoing a major transaction, you can still keep your proportionate share of the business and have a say in the future operations.
In this case, purchase rights protect shareholders from losing their stake in the company after a fundamental transaction, like an acquisition.
Example of purchase rights fundamental transactions clause
Here’s an example of what a "purchase rights fundamental transactions" clause might look like in a shareholder agreement:
“In the event of a Fundamental Transaction, the Shareholder shall have the right to purchase additional shares of the Company at the then-prevailing market price in order to maintain their percentage of ownership in the Company. Such rights shall apply to any transaction involving the sale of a majority of the Company’s assets or shares, including mergers, acquisitions, or similar events.”
Conclusion
Purchase rights fundamental transactions are essential tools for protecting investors and shareholders from losing their ownership stake during significant changes or corporate events. For SMB owners, understanding and offering these rights can help ensure fairness and maintain the trust of investors, especially when navigating major transactions like mergers, acquisitions, or sales. By granting purchase rights, businesses can allow investors to maintain their position and influence, ensuring stability and satisfaction throughout the process.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.