Piggyback rights, also known as “registration rights,” are provisions in investment contracts that give investors the right to register and sell their shares when a company or its principal shareholders are conducting a registered offering of its securities. These rights are most often associated with private equity or venture capital investors who want to ensure they will be able to participate in any future public offering of the company’s shares.
Here are the key aspects of piggyback rights:
- Inclusion in Public Offering: If the company decides to go public or the major shareholders want to sell some of their shares in a public offering, investors with piggyback rights can include their shares in the offering.
- Secondary Priority: Piggyback rights are typically secondary to the shares being sold by the company or its major shareholders. If the underwriters decide to cut back the number of shares in the offering due to demand concerns, the shares with piggyback rights are usually the first to be cut.
- Reduced Selling Costs: Investors benefit from piggyback rights because they can sell their shares without bearing the full cost of the offering. The offering’s lead participants will absorb most of the selling costs.
- No Control Over Timing: Investors with piggyback rights do not control the timing of the sale. They must wait for the company or other principal shareholders to initiate an offering.
- Market Impact Considerations: The exercising of piggyback rights may sometimes be restricted if the inclusion of additional shares could negatively impact the marketability of the offering.
- Beneficial to Minor Shareholders: Piggyback rights are particularly valuable for minority shareholders who might otherwise find it difficult to sell their shares in a public market.
- Negotiated Right: These rights are typically negotiated at the time of investment and outlined in the shareholders’ agreement or investment terms.
In the context of a sale or IPO, piggyback rights are one way for minority investors to liquidate their positions, ensuring they have an opportunity to benefit from the liquidity event alongside the company’s founders or principal shareholders.