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Affirmative Rights in shareholder’s agreement, explained.

Have you been looking for a fund raise? If yes, then in this post, we will explain the meaning of ‘Affirmative Rights’ which each investor looks for while executing a shareholder’s agreement while giving you his funds.

What does Affirmative Rights mean?

Affirmative, as the word suggests, means agreeing or consenting. Affirmative Voting Rights are typically inserted by the investors who do not hold equity shares in the company. By virtue of such affirmative voting rights, the investors tend to participate in the management of the company. 

What does Affirmative Voting Right clause say?

Usually, the clause on Affirmative Voting Rights in a shareholders’ agreement would state that a resolution at a board meeting or a shareholders’ meeting shall not be passed in respect of certain specified matters, unless unanimous consent of the Investors or the Board Observers is provided.

Which matters require Affirmative Voting?

Practically, given that a shareholders’ agreement is a private agreement between the shareholders, it can cover almost anything which the parties want. Therefore, it becomes very critical for the Founders to appropriately evaluate and agree on the matters stated for affirmative voting. Affirmative voting matters can be exhaustive, but those affecting the day to day business of the company include:

  • Cap on the expenses (capital or otherwise) over a certain threshold
  • Any alteration to the capital structure of the company, including raising fresh funds
  • Dividend rights
  • Using Company’s assets as collateral for any borrowings
  • Entering into any joint ventures, partnerships
  • Undertaking any related party transactions

This post is part of our Founder’s handbook – “Negotiating Shareholder’s Agreement”, a comprehensive handbook for founders to negotiate shareholder’s agreement. Click here to download the complete handbook.

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