The right of pre-emption, the simplest and most common form of percentage dilution protection, gives shareholders the right, but not the obligation to acquire in the future in proportion to new shares of a company in order to maintain its proportionate ownership. This right may apply to all classes of shares or only to certain classes of shares. THE SHS options give a shareholder the right, but not the obligation to resell its shares to the company (or other shareholders) at a time or at one or more events determined at a specified price or price determined by a predetermined formula. Investors who want to leave a business prematurely because it does not get certain income on a given date often need a put option. A put option may stipulate that a shareholder may resell all or part of his shares to the company (or other shareholders). With respect to put options, the remaining entity or shareholders may not be able to afford to buy back the shareholder who is conducting the sale. One way to mitigate this problem, if there is to be a put option, is to determine that payments can be made in increments, and until full payment, the sale shares are held in trust. In this case, it would be important to specify who will have linked the voting rights to Treuhand`s shares. It is possible that the company could soften the agreement for existing shareholders by allowing them to buy at a discount or at a discounted price. In India, the implementation of anti-dilution protection is complex, given existing legislation. For example, shares issued to foreign investors must comply with the price rules set out in Foreign Exchange Management (Transfer or Issue of Security by a Person Person Resident Outside India) Regulations, 2017 (“FDI Regulations”). In accordance with the price guidelines, capital instruments issued or transferred to a foreign resident must, in accordance with any internationally recognized pricing method, be subject to valuation on the basis of an arm duly certified by an accountant or a commercial banker or accountant practising in the case of an unlisted company.
Anti-dilution clauses are included in the shareholders` pact to protect an investor from dilution of equity resulting from subsequent share issues at a lower price than the initially paid investor (a “down-round”). A shareholder contract (SHA) is a contract between the shareholders of a company and often the company itself. A SHA defines shareholder rights and obligations, regulates the management of the company, ownership of shares, privileges, votes and various guarantees for shareholders. A SHA aims to set rules for shareholders to anticipate issues that may become controversial in the future.