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.
Why use this?
To encourage management teams to take a more active interest in ensuring that their businesses meet climate change related targets.
How to use this clause
Disclaimer - please read
The clauses on this website (and published in our Climate Contract Playbook) have been prepared in good faith on a pro bono basis and are free to download and use. The clauses have been drafted and edited by a variety of lawyers and, as such, the approaches to drafting may not conform to any particular drafting norms. We acknowledge this as a consequence of the collaborative drafting process.
The clauses on this website (and published in our Climate Contract Playbook) are provided on an ‘as is’ basis and without any representation or warranty as to accuracy or that the clauses will achieve the relevant climate goal or any other outcome.
This website (and the Climate Contract Playbook) does not comprise, constitute or provide personal, specific or individual recommendations or advice of any kind, and does not contain legal or financial advice. The clauses are precedents for legal professionals to use, amend and negotiate using their professional skill and judgement and at their own risk.
While care has been taken in the drafting of these clauses, neither The Chancery Lane Project nor any of its contributors owe a duty of care to any party in relation to their preparation and do not accept any liability for any errors or omissions, nor for any loss incurred by any person relying on or using these clauses or any other person. Users should use their own professional judgement in the application of these clauses to any particular circumstance or jurisdiction or seek independent legal advice.
At present, all the clauses are based on the laws of England and Wales. We encourage the conversion of these precedent clauses for use in other jurisdictions.
1. Conversion Rights
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 % 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.
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  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.
Glossary references: Net Zero Target