Climate Contract Playbook Edition 3
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The targets can be linked to established frameworks, e.g. ISO 14001:2015, and/or amended to align with the nature of a particular business or investor requirements. Consider using with Frank’s clause in relation to a company’s positive obligations and reporting requirements for investors, which can be amended to apply to management teams in investment documents.
This ratchet is drafted on the following basis:
There are two classes of Equity Shares – the investor[s] holds A Ordinary Shares and managers hold B Ordinary Shares. It is assumed that the investor would need to receive a minimum financial target amount before the ratchet is triggered. The parameters of the financial target have not been defined but, since it is envisaged that the primary purpose of the ratchet would be to incentivise achievement of the environmental target(s) (rather than financial overperformance) it is assumed that the financial target would be calibrated so that it only prevents the ratchet from being triggered in circumstances where the investment has materially underperformed from an investor return perspective. Examples of environmental targets which a business might wish to adopt have been included but these will need to be tailored to the specific case. If the ratchet is not triggered (because either the financial or the environmental targets are not met) on or before the occurrence of a “conversion event” (being a listing, sale or winding-up of the company), any equity proceeds on that conversion event will be allocated as between the two share classes in a specified default ratio – 75:25 is used here for illustrative purposes. The ratchet is drafted as a “top slice” ratchet. In other words, if the ratchet is triggered, proceeds from the relevant conversion event will be allocated as between the two share classes: (i) until such time as the financial target has been met, in the default ratio; and (ii) thereafter, in a new ratio which enhances the managers’ return – 65:35 is used here for illustrative purposes. Alternatively, the ratchet could be structured as a “ground up” or “cliff” ratchet such that all proceeds are allocated in the enhanced ratio provided all relevant targets are met (taking into account the operation of the ratchet itself). Non-cash consideration is not taken into account in the operation of the ratchet. The enhanced ratchet ratio is achieved by converting a portion of the investor’s A Ordinary Shares into valueless deferred shares. Tax specialists should review the drafting of any ratchet based on this template before it is incorporated into a company’s articles.
Notes for users
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.
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