320 8 Exit: Introduction
Termination and acceleration clauses. Termination clauses, acceleration
clauses and similar clauses set out the agreed terms of exit in long-term contracts.
The firm should therefore pay attention to such clauses.
In debt contracts, termination or acceleration is often triggered by the occur-
rence of an event of default. The definition of events of default is therefore impor-
tant. Particular cross-default clauses (section 4.3 and Volume II) can multiply risk.
Cirio, an Italian processor of food, was a case of cross-default in 2002. Cirio’s investors
expected the repayment of €150 million when their bonds matured, but Cirio did not have
those funds. This was serious, because default on any bond repayment could have triggered
a cross-default, immediate demands for repayment of all other bonds issued by the com-
pany, and a need to find a total of €1.1 billion in cash for its bondholders.^2
8.3.3 Risks Relating to Ownership Structure and Control
The exit of one or more investors can influence the share ownership or control
structure of the firm. For example, the nature of the firm will change if one share-
holder obtains control after buying other shareholders’ shares, and the firm might
be affected even where the firm’s main bank sells the firm’s debts to one or more
other financial institutions. There are many typical ways to mitigate such risks.
Control. The use of shares raises the question of control. The firm should en-
sure that it has the control structure it needs before and after the exit of a share-
holder (see Volume I).
Restrictions on the transfer of shares. For example, there can be restrictions on
the transfer of shares.
The firm can limit the transferability of shares by remaining private. If there is
no functioning market, it is more difficult for a shareholder to sell shares and more
difficult for a potential buyer to make a hostile bid for them. Moreover, the articles
of association of a privately-owned company may, depending on the governing
law, make the purchase of shares subject to further constraints.
In contrast, shares and other securities admitted to trading on a regulated mar-
ket must be freely transferable.
In both listed and privately-owned companies, the main shareholders can agree
not to sell their shares or on similar exit restrictions.
For example, Arsenal Football Club plc, a famous football club based in London, was con-
trolled by its board members who were also its main shareholders. They had a “lockdown
agreement” not to sell their shares until April 2008 at the earliest. This kept Arsenal safe
from an attempted takeover in 2007.
The firm may also implement other structural takeover defences (Chapter 18).
Strategic takeover defences include: block-holding by friendly shareholders; struc-
tural devices relating to shares (various classes of shares with differentiated voting
rights, special control rights conferred on holders of a specific class of shares,
(^2) Cirio folks, The Economist, November 2002.