Key Governance Provisions for Managing Acquired Entities
In offerings using Mainshares Investment Docs, we have worked with a number of entrepreneurs, investors and attorneys to create a framework for managing the acquired entity that protects investors while giving entrepreneurs the freedom to manage the business day-to-day as they see fit.
This governance package includes 15 provisions designed to guide strategic management decisions of the business:
-
Amend, modify or waive the certificate of formation or the LLC Agreement
This protects all parties from changing the fundamental documents governing the LLC without proper sign off.
-
Engage in or enter any business, whether directly or indirectly, other than the business described in the LLC Agreement.
This gives the investors oversight to any material pivots or changes to the business model, as Members of the LLC are prohibited from participating in or starting any business, not explicitly described in the LLC Agreement.
-
Authorize or issue any Securities, other than the Initial Authorized Units
This protects all parties from unfair dilution to their holdings without consent of the requisite parties.
-
Authorize or pay any distribution, other than those agreed to in the LLC Agreement
This ensures that all parties receive their distributions as agreed to in the LLC Agreement.
-
Enter into or effect any transactions or series of related transactions in excess of the Threshold Amount
This gives the manager freedom to operate the business while bringing forth larger strategic decisions to the investors. The Threshold Amount is set in the LLC Agreement and is typically $50K, although can fluctuate depending on the size of the business.
-
Incur any indebtedness, pledge or grant liens on any assets in excess of the Threshold Indebtedness;
This protection is designed to give the manager freedom to buy equipment and set up working capital lines of credit without issue, while mandating investor sign-off on loans in excess of the Threshold Indebtedness. The Threshold Indebtedness is set in the LLC Agreement and is typically $75K, although can fluctuate depending on the size of the business.
-
Enter into or effect any transaction or series of related transactions involving the purchase, sale, lease, license, exchange, or other acquisition or disposition (including by merger, consolidation, acquisition of stock, or acquisition of assets) by the Company of any assets and/or equity interests of any person;
Any M&A activity is required to be subject to review and approval by a majority of investors.
-
Increase, decrease, or modify the Manager Base Salary
As many of these investments are cash flow investments, the manager’s base salary can have a direct impact on distributable cash flow. As such, any modifications to the manager’s base salary requires approval by a majority of investors.
-
Change the tax classification of the Company for U.S. federal income tax purposes or make any tax election that would be reasonably expected to disproportionately and adversely affect the rights of, or create any new obligations of, the Class A Members;
Given that tax classifications have a material impact on the holders of units, any changes to the tax classification of the company requires approval by a majority of investors.
-
Any transfer of Class B Units by the Manager or any other Person;
If the manager(s) wants to issue membership units to additional members of the management team, they will need to receive approval by a majority of investors. This does not govern hiring activity but the issuance of Class B units in the LLC.
-
Cause the Company, or any Subsidiary (as defined in the LLC Agreement) or other entity directly or indirectly controlled by the Company (in any case, a “Lower-Tier Entity”), to form any Lower-Tier Entity that does not through its governing documents provide the Members, whether directly or indirectly, with substantially the same rights with respect to such Lower-Tier Entity, as set forth in this Section with respect to the Company;
This provision dictates that the Company cannot create additional entities unless those new entities, through their governing documents, afford the members substantially the same rights that they have pursuant to the LLC Agreement. This protects the investors from being cut out of the earnings and value of any related entity.
-
Cause the Company, or any Lower-Tier Entity, to form any Lower-Tier Entity that provides any Member with direct or indirect rights or benefits in such Lower-Tier Entity in a manner that is disproportionate to those rights and benefits of the Members in the Company unless the disproportionality arises from the written waiver by a Member of such a right or benefit provided to such Member;
This provision prohibits the Company or any related entity from creating additional entities that grant any Member direct or indirect rights or benefits in a manner that is disproportionate to the rights and benefits of the Members in the Company, unless such disproportionality is explicitly waived in writing by the affected Member.
-
Cause the Company or enter into, amend, waive, or terminate any agreement, arrangement, transaction, or understanding or series of related agreements, arrangements, transactions, or understandings (i) between the Company and any Member or Manager or any Affiliate of a Member or Manager or (ii) between any the Company and any Lower-Tier Entity or (iii) between the Company or a Lower-Tier Entity and any member or manager or any Affiliate of a member or manager of the Company or such Lower-Tier Entity;
This says the Company can't start, change, or end any agreements or deals between the Company and its members, managers, or affiliated entities without consent of the majority of investors. This protects the investors by regulating and limiting various business arrangements involving the Company and its related entities.
-
Change the amount of Required Cash Reserves
Distributions will be made subject to the company’s cash reserves. Any changes to the required cash reserve threshold requires review and approval by a majority of investors.
-
Dissolve, wind-up, or liquidate the entity or initiate a bankruptcy proceeding involving the Company or any Lower-Tier Entity.
If management would like to dissolve the entity or any subsidiary for whatever reason, that action will require review and approval by a majority of investors.
As can be seen from these provisions, the majority of day-to-day operations is left fully in the hands of the manager. This includes purchase decisions, supplier and vendor relationships, hiring and firing decisions, as well as ongoing management.