Understanding Liquidation Agreements in the Tech Industry

Understanding the legal implications of entering into a comprehensive liquidation agreement within the context of what SaverOne does – namely, to help prevent distracted driving for transport companies – is important to understanding the ramifications for such an agreement for anyone who has an interest in a finance, investment or VC context. This article will talk about that by zeroing in on the intersection of finance, tech and the law.

What is a liquidation agreement? Simply put – legally binding contracts between a tech company (either public or private) and its shareholders. They have a lot of legal importance for the company itself, but also for the company’s investors. This includes the importance for a tech company’s shareholders who may seek liquidation events like selling their shares, liquidating assets, buying up more shares, etc. In doing this, a tech company and its shareholders, etc. need to know about the ins and outs of a liquidation agreement.

Despite how important liquidation agreements are, there is still a necessity to understand how a liquidation agreement affects a company’s shareholders, and how it can play within the broader business strategy, from a financial perspective (including such things as dividends, bonuses, etc.) to a tech investment strategy perspective. Understanding these two benefits from a liquidation agreement is where many of the investor interest comes from in terms of the difference of share prices.

Liquidation agreements allow a tech company to enter into an agreement with its shareholders – either all of them, or a significant portion of them – to agree to a number of financial strategies that a tech company will be responsible for (normally, changes to shareholder dividends, offering bonuses, issuing preferential shares, etc.), and confers the ability for the shareholders to bring suits against the tech companies for a violation of the terms of agreement.

So why would a tech company like SaverOne enter into a liquidation agreement? Again, one reason is because it allows a tech company to be flexible in dealing with its shares and subsidiaries within the confines of the law, yet still be able to derive the benefits that it wouldn’t normally get if it were to give, say, 10% of the value of an asset away to the shareholders or grant preferential treatment to a particular shareholder, etc. Other reasons include (but are not limited to) the following:

• Liquidation agreements also allow tech companies to receive the benefits of having shareholders with a smaller portfolio of shares – at the extreme of this is the death of a shareholder, or a large acquisition from a 3rd party – without having to worry about spreading its resources too thin.

Finally, other reasons include:

These are by no means an exaggeration of the ramifications that a liquidation agreement may entail for a tech company. The bigger issue that arises, of course, is whether or not it is wise for a tech company to enter into a liquidation agreement. Consider the following example of a hypothetical real world tech company that has decided to remit a large amount of its shares to its shareholders (SaverOne).

What a liquidation agreement does not guarantee is protection from litigation. In fact, the liability that a tech company faces when it enters into such an agreement can, at times, be worse than without a liquidation agreement. This is especially true in cases when a shareholder feels that they have been adversely affected by the liquidation agreement. For example, a plan that only offered stock buyback or preferential treatment to a minority shareholder, but nothing else (i.e. no provision for assisting them outside of the above), may be open to extensive litigation if it’s discovered that the other provisions of the plan that a shareholder was not offered benefited only a small portion of other shareholders.

If you’re an investor working on a tech deal, understanding the importance of having a liquidation agreement is important, especially when it comes to how it fits into the bigger picture of a financial deal. A liquidation agreement is more for an investor who wishes to play case when it comes to their investment, and will only be able to influence certain shareholder equity strategies. Even then, shareholders will agree to clauses in these plans that forbid them to sue on the matter. If your investor is a private equity firm, say, they might issue a high interest loans that will benefit both the shareholders and the tech company – even at the cost of some share dividends. Liquidation agreements also allow a new CEO (or whomever is taking over a tech company), to come into power without having to face any sort of obstacles, political maneuvering etc. that could prevent the CEO from making strategic changes and implementing a new strategy for the company.

A liquidation agreement is an important business tool when used appropriately in the context of a finance and technical business. For this reason, it’s essential to have good legal counsel that is well versed in technology and is familiar with the operation of the tech company, so that the liquidation agreement is drafted appropriately such that it does not violate any corporate policies, fiduciary duties or legal obligations.