Minority investors in a closely held business often find that they have little control over the direction of the company, with most corporate action often requiring only a majority vote at the shareholder or board level. That is why venture capital investors typically create a separate class of preferred stock that gives them a greater degree of control over corporate decisions including board representation and approval rights for significant corporate actions including the hiring of senior management.
Companies are often, however, reluctant to agree to board seats or issue preferred stock unless the investor is making a substantial capital investment. In those situations where board representation is not an option, minority investors might consider putting in place contractual obligations to participate in the affairs of the company and get regular updates on how the company is performing. This type of agreement is referred to as a Management Rights Agreement and, although it is an imperfect alaternative to other forms of control, it gives the investor the opportunity for investors to stay informed about the what is going on at the company. A Management Rights Agreement is between the company and the individual investor and can provide the investor with the right to:
• Consult and advise management
• Review annual operating plans
• Receive regular updates from management on progress against plans
• Have access to management
• Examine the books and records of the company
• Receive all board of directors notices, minutes, and materials
• Make presentations and address the board of directors
Here is some sample language I use in our forms:
If Investor is not represented on Company’s Board of Directors, Investor shall be entitled to consult with and advise management of the Company on significant business issues, including management’s proposed annual operating plans, and management will regularly make itself available to meet with Investor regularly during each year at the Company’s facilities at mutually agreeable times for such consultation and advice and to review progress in achieving said plans.
Investor may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the Company’s financial condition and operations, provided that access to highly confidential proprietary information and facilities need not be provided.
If Investor is not represented on the Company’s Board of Directors, the
Company shall, concurrently with delivery to the Board of Directors, give a representative of Investor copies of all notices, minutes, consents and other material that the Company provides to its directors, except that the representative may be excluded from access to any material or meeting or portion thereof if the Board of Directors determines in good faith, upon advice of counsel, that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information, or for other similar reasons. Upon reasonable notice and at a scheduled meeting of the Board or such other time, if any, as the Board may determine in its sole discretion, such representative may address the Board with respect to Investor’s concerns regarding significant business issues facing the Company.
