A protective provision, also known as a veto right, is a clause that gives investors a level of control or provides safeguards over certain company actions. Protective provisions are commonly used in investment agreements to protect the rights and influence of investors.
For warehouse facilities specifically, protective provisions allow investors to have oversight and restrict certain material company changes that may put their investment at risk.
What are Common Protective Provisions for Warehouse Facilities?
Some of the most common protective provisions that investors may require for investments in warehouse facilities include:
1. Restrictions on Additional Debt or Liens
This provision limits the amount of additional debt or liens the company can take on without investor approval. For example, the company may not be able to take on debt above a set debt-to-equity ratio or a pre-specified amount. This ensures the company does not become overleveraged.
2. Limitations on Asset Sales
This provision would require the company to obtain investor consent before selling material assets. Since it can impact tangible net worth calculations.
3. Change in Business Restriction
This prohibits the company from making substantial changes in their core business or corporate structure without investor approval. Basically requiring the business to continue operating the warehouse facility.
4. Transfer Restriction
The founders or management team may be restricted from transferring or selling their equity stake without approval. Investors want the key leaders involved in running the company.
5. Inspection and Information Rights
This allows investors access to inspect the facility and records with reasonable notice. They want visibility into the physical site and operational metrics.
6. Right of First Refusal
Gives investors the right of first refusal if the company wants to raise another debt facility.
Why Do Investors Require Protective Provisions?
There are several important reasons why investors negotiating deals with warehouse facility startups and operators require protective provisions:
1. Reduce Downside Risk
The number one reason is downside risk mitigation by maintaining influence over major corporate finance and governance decisions. Warehouse facilities require significant upfront capital expenditures and are risky assets with narrow profit margins. Investors want tools to prevent worst case scenarios.
2. Oversight Over Assets
In addition to financial oversight, investors want a level of control over operational decision making involving the core warehouse facility assets.
3. Maintain Influence in Exit Scenarios
In a situation where the company is considering strategic alternatives like a merger, acquisition, or IPO, protective provisions keep investors involved in the process. They provide leverage for investors during negotiations and ensure their interests are protected in exit scenarios.
Incorporating Protective Provisions in Investment Agreements
Now that we’ve covered the importance of protective provisions, here is a brief overview of how they are actually implemented in legal investment documents:
Charter Documents
Protective provisions begin with the foundational corporate governance documents like Certificate of Incorporation and Company Bylaws. These charter documents carve out special rights for preferred shareholders.
Stock Purchase Agreements
During priced investment rounds, the detailed Stock Purchase Agreement specifies protective provisions agreed to as conditions of the financing. SPAs also amend charter documents as needed.
Shareholder Agreements
A Shareholder Agreement establishes additional rights like information access, inspection, election of board seats, and claims to company distributions. This contract binds major investors and common stockholders.
Voting Agreements
Voting Agreements require certain shareholders to vote together as a block to elect certain investor-friendly directors. This guarantees board seat control between founder, executive, and investor directors.
These legal instruments work together to codify the special rights and influence granted to investors making significant capital commitments to the warehouse facility enterprise.
Conclusion
In closing, protective provisions give investors veto rights and influence over decision making involving significant changes to warehouse facility assets, business operations, financial structures, ownership, and exit events. Investors require these provisions to reduce downside risk, maintain operational oversight, and protect their interests especially compared to common shareholders.
mize the chances of mutual success.