BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
6. Exits 6.1 Investor Exit Rights
a third party, they must notify the investors that, within a certain period, they may alternatively: • exercise the pre-emptive right and acquire the founders’ shares; or • exercise the tag-along and sell their shares together with the founders’ shares. Other Transfer Restrictions Other transfer restrictions include right-of-first- refusal (ROFR) and right-of-first-offer (ROFO) provisions, giving the non-selling shareholder a prior-refusal right or first-offer right, as applica - ble, in the event of a sale of shares by the selling Exit triggers are specific conditions defined in shareholder agreements that activate certain rights or obligations concerning an exit event. Sale of a company’s control (often defined as a transaction where more than a certain percent - age of the company’s shares are sold, or where there is a sale of substantially all assets of the company) and IPOs are typical exit-triggering events. shareholder. Exit Triggers Understanding and negotiating these provisions requires careful consideration of the dynamics between different groups of investors and the founders, as well as of the strategic goals of the company. When properly structured, these provisions ensure that all parties can realise the value of their investment under fair and equitable conditions during an exit. In Brazil, mergers and acquisitions continue to be the vast majority of exits for start-ups, as opposed to the almost non-existing IPOs. Hence, investors’ rights such as drag-along and tag-along provisions are often the subject
Sales to strategic buyers or other institutional investors comprise the vast majority of exit forms for VC-backed start-ups in Brazil, though the number of successful IPOs in past years has increased. Exit-related provisions in shareholder agree - ments to regulate those processes include the following. Drag-Along Rights Certain shareholders (usually majority share - holders) can force other shareholders to par - ticipate in the sale of the company. In the VC industry, a typical drag-along clause states that if shareholders holding a qualified major - ity of the share capital (eg, 70%) wish to sell their shares to a third party, they may require the other shareholders to include their shares in the sale, under the same conditions offered by the third party. To protect themselves from unfair “forced” sale, some investors require the inclusion of a contractual provision whereby they can only be “dragged” into a sale transaction if the price per share offered by the third-party purchaser is higher than a certain multiple of the price per share paid by the investor. Tag-Along Rights (Co-Sale) These are used as a protection mechanism for minority shareholders, by giving them the right to join in a sale of shares by majority shareholders on the same terms. This ensures that they can benefit from the same terms as the exiting, sell - ing shareholders. VC investors require tag-along rights in investment rounds, as an alternative to pre-emptive rights. Once the lock-up period is over, if the founders wish to dispose of their shares and have received a binding offer from
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