Exit rights depend on the negotiated agreement
Series XIX-A case study · set 3, case 5 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
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Aspen Fund owns 20% of a private company, its founder owns 60%, and other shareholders own 20%. A signed shareholder agreement gives Aspen a proportional tag-along right when the founder sells shares. In the proposed transaction, the founder will sell one-quarter of her own holding, and Aspen may sell the same proportion of its holding on identical price terms. The buyer values the company’s entire equity at ₹100 crore. The agreement separately requires Aspen’s consent before additional company borrowing above an agreed threshold, but gives it no right to run everyday purchasing. Ignore taxes and costs. A possible future IPO has been discussed but has not been approved or scheduled.
All rights are explicitly negotiated assumptions for this case.
All ordinary shares have the same price per ownership percentage.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Aspen Fund owns 20% of a private company, its founder owns 60%, and other shareholders own 20%. A signed shareholder agreement gives Aspen a proportional tag-along right when the founder sells shares. In the proposed transaction, the founder will sell one-quarter of her own holding, and Aspen may sell the same proportion of its holding on identical price terms. The buyer values the company’s entire equity at ₹100 crore. The agreement separately requires Aspen’s consent before additional company borrowing above an agreed threshold, but gives it no right to run everyday purchasing. Ignore taxes and costs. A possible future IPO has been discussed but has not been approved or scheduled.
All rights are explicitly negotiated assumptions for this case.
All ordinary shares have the same price per ownership percentage.
Q1What percentage of the entire company may Aspen sell under this tag-along proposal?
Option A. 20%
Why it is wrong: The agreement permits sale of one-quarter of Aspen’s holding, not all of it.
Option B. 15%
Why it is wrong: This is the founder’s sale as a percentage of the entire company.
Option C. 5% — Correct answer
Option D. 25%
Why it is wrong: This is the fraction of each eligible holder’s own holding, not of the company.
Answer: C. Aspen may sell 25% × 20% = 5% of the company. The proportional right follows the fraction of the founder’s own holding being sold. Remember: Apply a tag-along fraction to the holder’s own stake.
Hint, shown before you answer in practice mode: Take one-quarter of Aspen’s 20% holding.
XIXA-S3-C05-Q1mediumnumerical
Q2What cash would Aspen receive if it exercises that right fully?
Option A. ₹5 crore — Correct answer
Option B. ₹15 crore
Why it is wrong: This values the founder’s stake being sold.
Option C. ₹25 crore
Why it is wrong: This treats the quarter-sale fraction as 25% ownership of the company.
Option D. ₹20 crore
Why it is wrong: This values Aspen’s entire pre-sale stake.
Answer: A. Aspen sells 5% of equity valued at ₹100 crore, so its proceeds are ₹5 crore. This is before the costs and taxes expressly excluded from the case. Remember: Use the equity interest actually sold to calculate proceeds.
Hint, shown before you answer in practice mode: Apply the ownership sold to the transaction’s equity value.
XIXA-S3-C05-Q2easynumerical
Q3What does the borrowing-consent clause allow Aspen to do?
Option A. Force the buyer to purchase all shareholder holdings.
Why it is wrong: The borrowing clause has no such exit provision.
Option B. Direct every routine purchase by the company.
Why it is wrong: The agreement expressly excludes everyday purchasing control.
Option C. Guarantee that the company will repay all debt.
Why it is wrong: A consent right is not a credit guarantee.
Option D. Approve or refuse the specified borrowing decision under the agreement. — Correct answer
Answer: D. The clause creates a protective decision right over the stated borrowing. It does not give general day-to-day control or guarantee the company’s financial outcome. Remember: Distinguish protective consent rights from operating control.
Hint, shown before you answer in practice mode: A reserved-matter right is limited to the defined decision.
XIXA-S3-C05-Q3mediumapplication
Q4How should the distributor describe the possible IPO?
Option A. As the only possible exit despite the proposed secondary transaction.
Why it is wrong: The passage already describes another possible exit route.
Option B. As a guaranteed exit on a known date.
Why it is wrong: No approval or date has been established.
Option C. As a completed transaction because it was discussed.
Why it is wrong: Discussion is not execution.
Option D. As an uncertain potential exit route that is not yet approved or scheduled. — Correct answer
Answer: D. An IPO is one possible future route, but the case provides neither approval nor a schedule. The proposed tag-along sale is a separate event and should be described on its own terms. Remember: Communicate the status and uncertainty of exit plans.
Hint, shown before you answer in practice mode: Use the actual stage of the proposal.
XIXA-S3-C05-Q4easyapplication
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