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Institutional investor can be a company or an organization that manages and invests large sums of money in the market in order to generate profits on behalf of their clients. They do not use their own money, but rather invest money on others’ behalf. Common examples of institutional investors are pension funds, banks, mutual funds, hedge funds, endowments, and insurance companies.
Individual investors, on the other hand, invest their own money by themselves in smaller amounts to maximize profits. Because of the low volume and low frequency of trade, individual investors often have to pay higher commissions and fees on their investments.
The main differences between the institutional investor and the individual investor are (i) the rate at which each trades, (ii) the volume of money involved in their trades, (iii) the costs each pays to invest, (iv) their investment knowledge and experience, and (v) the access each have to important investment research.
Investment in unlisted companies can be made when companies raise a round of funding or at the time of a secondary transfer of shares. If investors hold demat accounts, then the shares are directly transferred into their demat account. Another option is by way of approaching portfolio managers. Apply caution while selecting an intermediary. Make sure that they help you close the deal and avoid any counterparty risk.
Majority shareholders directly or indirectly hold more than 50% of shares or the controlling interest in a company. They have a significant amount of influence over the company and can take part in significant decisions that include:
- Appointment and removal of directors
- Attend and vote at general meetings
- Initiate liquidation/winding up of the company
- Mergers and amalgamations
- Sales of undertakings
- Variations of shareholder rights
- Alterations in memorandum of association or articles of association
- Approval of audited financials and boards reports
- Declarations of dividends
- Reduction in capital
Additional rights agreed in the shareholders’ agreement include the right to:
- Inspect statutory registers and minutes books.
- Receive copies of financial statements.
- Board representations.
- Management rights.
- Access to additional information and records of the company.
- Liquidation preferences.
Minority shareholders own a smaller percentage of the company’s equity. They have some authority, but they don’t have complete control because they own less than half of the corporation. Generally, they can vote and have their perspectives heard, but their votes are not enough to directly impact a company’s decision.
Minority shareholders can influence the board’s decision by getting affirmative voting rights through shareholders/investment agreements. Such rights should also be incorporated in the articles of association of the company. Also since the board of directors have to act not just for the benefit of the company but also in their fiduciary capacity to protect the shareholders, the Companies Act 2013 has laid down certain provisions for the protection of minority shareholders to prevent oppression and mismanagement. Company and its board have to work consistently to strike a balance between the rule of the majority and the rights of the minority.
Affirmative voting rights, also known as veto or reserved or consent rights, refer to legally agreed-upon issues that are typically found in shareholder agreements, joint venture agreements and other investor agreements. It is a safeguard given to the investors whereby it is mandatory for the founders and the board of directors of the company to obtain shareholders’ consent before making decisions on subjects covered by affirmative voting rights. No decision can be implemented by the company unless the holders of affirmative rights agree. This right is applicable even if the majority shareholders have sufficient shareholding to approve such decisions. These matters generally protect the rights of the minority shareholders.
Few examples of affirmative matters include:
- Mergers, demergers, amalgamations, consolidations;
- Acquisition of other businesses by way of purchase of shares, business transfer, asset purchase;
- Creation of joint ventures or partnerships, creation of a subsidiary;
- Any strategic, financial or other alliance with a third party which results in investments by the company;
Approval of any business plan or annual plan; (vi) changes in terms relating to vesting of founders and so on.
Flip structure means acquisition of a domestic firm by a foreign or overseas company. Majority of the shares will be held by the foreign company.
By this means, unicorns are able to avoid the Indian regulatory landscape, as well as the country’s tax rules and government inspection. However, there is a security risk on the digital data and its storage, as well as a significant loss of future value creation potential from any linked IPs of that company.
On the other hand, the national economy suffers with the loss of all future tax on capital gains, public listing and operational earnings within India.
ROFO- If any of the founders or other shareholders intend to transfer their shares, the existing investors of the company will have a right of first offer to purchase all or part of such shares being offered for sale. However, the selling shareholder can still transfer such shares to a third party, if the price quoted is higher than the price offered by the investors.
ROFR- In an event that any of the founders or shareholders of the company wish to transfer their shares, the other existing investors will have a right of first refusal i.e., the investors can purchase such shares on a pro-rata basis at the same valuation and terms offered to a third party buyer. If the investors who hold the right to ROFR do not exercise their right to purchase the shares, then other investors can take up on the offer.
A ROFR benefits the long-term shareholders (likely buyers), whereas ROFO benefits the sellers.
What?
Simply put, Options are ‘rights’ granted to employees (and not obligations) to acquire the shares of the employer company at a fixed price (or Strike Price) against satisfaction of some conditions (Vesting Conditions). While the employee is not bound to exercise the Options, the company will be bound to honour the Grants as per its terms and conditions.
Why?
There are some tangible benefits: Employee ownership means that they participate in the growth of the company. This will therefore help attract and retain talent and incentivise employees to work for the growth of the company.
The Intangible benefits: There are a few intangible benefits. Firstly ownership in the company helps create an emotional connection with the company. Secondly, it is a way for the management to express the importance of the Grantees. Thirdly, if done well, company goals can be aligned with individual goals. This gesture goes a long way in, motivating the personnel, team building, reducing attrition and improving the “employee brand” of the company.
Yes, the pool size can be increased by the company as part of a funding round or in between funding rounds. If required, the company can create a new ESOP plan by passing a special resolution and filing Form MGT-14 with the Registrar of Companies.
When a company is acquired, it means that another company has purchased it to have control over the organization and form a single business entity. Depending upon the negotiations, the acquiring entity may end up acquiring all the assets and liabilities of the company. Also, there are high chances that few of the employees will be laid off.
There is no standard or precise formula to calculate the ratio for conversion to adjust the options of the old company against the acquiring company. The conversion ratio is determined through a variety of factors, such as debt levels, dividends paid, earnings per share and profits. Further, there are a variety of factors that can impact the employee’s equity at the time of acquisition:
- Exercised shares: Most of the time in an acquisition, your exercised shares get paid out, either in cash or converted into common shares of the acquiring company.
- Vested options: Sometimes a deal might state that any vested shares are cashed out net of the strike price, which could mean your gain is small if the acquisition price is close to the exercise price in your grant. There can also be acceleration clauses in the event of an acquisition.
- Vesting: Employees may also have to reach certain milestones, generally time spent at the new company before the acquirer gives them cash or stock for their prior shares. This occurs when companies want to retain specific talent. For any new options or bonuses, employees will likely get a fresh new vesting schedule or one that matches their old grant.
Acceleration: There may also be accelerated vesting of options on tenure, milestones, or termination at the new company.
