Management Equity Ratchet Terms
A template clause for inclusion in investment documents to financially incentivise management teams to meet targets which are linked to climate change and environmental issues.
What this clause does
To encourage management teams to take a more active interest in ensuring that their businesses meet climate change related targets.
Clauses
1. Conversion Rights
1.1 (see Definitions)
1.2 The purpose of this Article [●] is to adjust the share capital of the Company so that the A Shareholder Proceeds and the B Shareholder Proceeds shall be the proportions of the Capitalisation Value calculated in accordance with this Article [●].2:
1.2.1 firstly, the Capitalisation Value shall be split between the A Shareholder Proceeds and B Shareholder Proceeds in the ratio of [75:25] until the Target Amount shall have been received by the Investor[s]; and
1.2.2 secondly, provided a Ratchet Trigger has occurred, the balance (if any) of the Capitalisation Value (after deducting the amount allocated under Article [●].2.1) shall be split between the A Shareholder Proceeds and the B Shareholder Proceeds in the ratio [65:35].
1.3 On the Conversion Date, conditionally upon the occurrence of the relevant Conversion Event, such number of A Ordinary Shares shall automatically be converted into Deferred Shares such that:
1.3.1 the A Shareholder[s] shall [between them] receive the A Shareholder Proceeds;
1.3.2 the B Shareholders shall between them receive the B Shareholder Proceeds; and
1.3.3 the price per Equity Share on the relevant Conversion Event shall be identical for the A Shareholder[s] and the B Shareholders.
1.4 The Board shall determine, and notify the Investor[s] and B Shareholders of, the estimated Conversion Date (the “Estimated Conversion Date”) and, no later than [20] Business Days prior to such Estimated Conversion Date, shall procure that the calculations provided for in Articles [●].2 and [●].3 are carried out by reference to the Estimated Conversion Date. The Board shall notify the Investor[s] and B Shareholders in writing of the results of such calculations as soon as reasonably practicable after they become available.
1.5 Following receipt of such notice, the Investor[s] and the B Shareholders shall endeavour to agree the value of the A Shareholder Proceeds, the B Shareholder Proceeds and the number of A Ordinary Shares to be converted into Deferred Shares.
1.6 If the Investor[s] and the B Shareholders have failed to reach unanimous agreement pursuant to Article [●].5 by the date which is 10 Business Days prior to the Estimated Conversion Date, the matter shall be referred to [dispute resolution mechanism to be included].
1.7 If, after the number of A Ordinary Shares to be converted into Deferred Shares has been agreed or determined but before any Conversion Date, there shall be:
1.7.1 any change in the Capitalisation Value; or
1.7.2 any delay in the occurrence of the Conversion Date such that it is expected to occur in the month following the month in which the Estimated Conversion Date falls, the procedures set out in Articles [●].4 to [●].6 shall be repeated (as often as required) and the calculations recomputed accordingly.
1.8 On the Conversion Date, conditionally upon the occurrence of the relevant Conversion Event, such number of A Ordinary Shares as shall, subject to Article [●].7, have been agreed or determined as being subject to conversion shall automatically be converted into Deferred Shares.
1.9 Any conversion of shares pursuant to this Article [●] shall be made on the following terms:
1.9.1 the conversion shall take effect immediately on a Conversion Date at no cost to the holders of the shares to be converted, and such shares shall be apportioned rateably (or as near thereto as may be practicable to avoid the apportionment of a fraction of a share) among the holders of shares of that class;
1.9.2 the holders of the relevant shares to be converted shall each deliver their old share certificates to the Company for cancellation (or an indemnity in lieu thereof); and
1.9.3 the Company shall issue share certificates to the persons entitled to shares resulting from the conversion.
1.10 Following any conversion of shares pursuant to this Article [●], the Company shall procure that all necessary steps are taken to ensure that such conversion is documented accurately and all filings and any other relevant formalities are complied with.
1.11 The Investor[s] shall be entitled, in [its/ their] sole discretion, at any time on or before the occurrence of a Conversion Event, to waive any of the Environmental Targets by written notice to the Company.
Definitions
1.1 In this Article [●] (Conversion Rights), save where the context requires otherwise, the following expressions shall have the following meanings:
A Shareholder Proceeds means the sum comprising such proportion of the Capitalisation Value to which the A Shareholder[s] [is][are] entitled, calculated in accordance with Article [●].2.
B Shareholder Proceeds means the sum comprising such proportion of the Capitalisation Value to which the B Shareholders are entitled, calculated in accordance with Article [●].2.
B Shareholders means, for the purposes of this Article [●] only, the holders of B Ordinary Shares immediately prior to the conversions effected by this Article [●].
Capitalisation Value means:
(a) in the event of a Listing, the aggregate value of all the shares (expressed in pounds sterling to the nearest three decimal places) for which a Listing is obtained (being, in the case of an offer for sale, the underwritten price (or if applicable the minimum tender price), or, in the case of a placing, the placing price) (but excluding any new shares issued as part of the arrangements relating to the Listing (other than any new shares to be paid up by way of capitalisation of reserves)) [net of the aggregate costs of the Listing attributable to the shareholders (save to the extent that any such cost has been borne by any member of the Group and has been taken into account in the Listing price per share)];
(b) in the event of a Sale, the aggregate consideration payable in respect of such Sale to the holders of the Equity Shares [(net of the aggregate costs of the Sale attributable to the shareholders)]; and
(c) in the event of a Winding-Up, the amount to be distributed in the Winding-Up to the holders of the Equity Shares [(net of the aggregate costs of Winding-Up attributable to the Shareholders)].
Carbon Footprint Standards means internationally recognised standards to measure, manage and demonstrate carbon credentials covering organisations (WRI Greenhouse Gas Reporting, BEIS Voluntary Reporting Guidelines, GHG Protocol Corporate Accounting and Reporting Standard), projects, product and services (PAS 2050:2011, ISO 14001, GHG Protocol Product Life Cycle Accounting and Reporting Standard) and events (PAS2060/ISO 20121).
Conversion Date means the date on which, conditionally upon the occurrence of the relevant Conversion Event, A Ordinary Shares are converted into Deferred Shares pursuant to this Article [●].
Conversion Event means any one of the following events:
(a) the obtaining of a Listing;
(a) the entering into of an unconditional agreement for a Sale, or where an agreement for a Sale is conditional in any respect, that agreement becoming unconditional in all respects; or
(b) a Winding-Up.
Environmental Targets means:
(a) the Group achieving the Net Zero Target;
(b) the Group achieving one of the Carbon Footprint Standards;
(c) the establishment by the Group of a sustainability committee as a committee of the Board chaired by a non-executive director with experience of improving sustainability and mitigating carbon footprint;
(d) the purchase by the Group of electricity for its offices [and factory] on a green tariff that uses 100% renewable energy; [and]
(e) the use by the Group of web hosts and cloud service providers which run their servers on 100% renewable energy or have their own Net Zero Target[; and][.]
(f) [others as applicable to the business].
Equity Shares means the A Ordinary Shares and the B Ordinary Shares.
Listing means the admission of the whole of any class of the issued share capital of the Company (or any new holding company) to any [Recognised Stock Exchange].
Net Zero Target means that the balance between greenhouse gas emissions from all operations and greenhouse gas removals, accounted for by credits from either insetting or offsetting projects, is zero.
Ratchet Trigger means the satisfaction (or waiver by the Investor[s] in accordance with Article [●].11) of each of the Environmental Targets on or before the occurrence of the relevant Conversion Event.
Sale means [the transfer of more than [50]% in number of the Equity Shares to a buyer].
Target Amount means the amount which would be required to be received by the Investor[s] in order to provide the Investor[s] with [financial target].
Winding-Up means a liquidation of the Company.
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