Corporate governance and upside sharing agreements

Upside sharing agreements (otherwise referred to as compensation agreements) are arrangements which are sometimes entered between an investor (usually a private equity investor) and the promoters and/or management of a listed company with an understanding that if the investor (at the time of its exit) makes a profit on its investment, a certain portion of such profit will be shared in an agreed proportion with the promoters and/or management by the investor. These agreements are quite common in merger and acquisition deals and are often linked to the company achieving performance criteria, continued employment, etc.

In most cases companies are not party to such agreements and no obligations are undertaken by the companies. Moreover, there is no outflow of funds from the company and therefore companies in most cases have not sought approval of the board or shareholders for such an agreement. With this background, the Securities and Exchange Board of India (SEBI) took cognizance of this and decided to regulate such agreements by way of a recent amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

SEBI decided that any new upside sharing agreement between promoters/directors including the management and a shareholder including a third-party investor in a listed company will require prior approval from the board of directors and the public shareholders of the listed company. Additionally, all existing agreements of a like nature will also require approval from the board and need to be put before the public shareholders for approval in the next general meeting of the company.