Transfer restrictions in the articles of association of Start-Ups

# Start-Up

When founding a limited liability company, the establishment of articles of association is mandatory. In these articles of association extensive rights and obligations of the shareholders including change-of-control clauses or clauses concerning pre-emption rights and rights of assignment, can be regulated.

In accordance with the wishes of the shareholders such transfers may be subject to approval rights of the other shareholders. An unpleasant partner can be prevented by the existing shareholders. Hence, corresponding regulations in the articles of association are of crucial importance. Nevertheless, they should be negotiated carefully with start-ups and adapted according to the company’s growth plan.

Recently, I was mandated by two groups of invesetors with regard to two different start-ups. Both companies are still in an early-stage phase with a relatively low company valuation. Due to a large number of already existing direct and indirect national and international investors the clauses in the two articles of association proved to be exaggerated and disadvantageous for the shareholders.

The complex rules in the articles of association caused disproportionate transaction costs which consequently reduced the company valuation.

Hence, articles of association should be proactively adapted step-by-step to the respective growth phase of the company.