Shareholders agreements: Key considerations for renewable energy project developers

On 7 May 2020, REPP hosted a webinar on shareholders agreements, during which a panel of legal experts unraveled some of the complexities around this vital, but often confusing, area of project development. The webinar included a panel discussion and a Q&A session that made for a lively talk on many issues around shareholders agreements. Below guest speakers Joanne Elson (Senior Associate at Herbert Smith Freehills) and Tinashe Makoni (Senior Counsel at SunFunder) revisit some of the key questions raised during the event.

What happens if you don’t have a shareholders agreement?

JE: Without a shareholders agreement, you are relying on your corporate documentation, such as your memorandum and articles of association to determine how the company is governed, e.g. how meetings are held, how shareholders’ resolutions are taken and how voting is carried out. These corporate documents tend to be standardised and in some cases very long-winded documents that are not actually tailored to deal with all of the issues that are important to your project and your business. As such, they’re not ideal for protecting shareholders’ rights and lenders will certainly be looking for more than that. 

Another point to make is that the memorandum and articles of association are public documents, whereas shareholders agreements are private. Shareholders agreements therefore have the added advantage of enabling you to outline how you wish to run the company outside the public gaze.

From a debt funder’s perspective, how do you generally approach shareholders agreements?

TM: As a general rule of thumb, governance issues take greater prominence in smaller projects, whereas for larger projects it is more about the money.

This is because in larger projects, which are typically more complicated and where construction might take longer, we expect the money to come in in phases or at certain milestones, and often there is a real risk of cost overrun. So we might start off asking ourselves, are the shareholders obliged to inject equity? And if they aren’t, what mechanisms are there in the documentation to compel them to do so? 

For smaller projects – which generally speaking have limited execution risk, the tech is fairly robust and they are not usually super-complicated – the shareholder’s money is typically required to be injected up front, making them less risky from that point of view than larger projects. So, the focus of our analysis tends to be on governance issues, such as has KYC been done on the present shareholders? Or what happens when new shareholders come in? And are we comfortable they will not be politically exposed or fall out of our AML requirements and so on? 

Another important aspect we look at is change of control. If the original shareholder wants to move on in future, are we comfortable the project company will retain both the funds and expertise to execute the project? Do we want to insist the documentation ties in certain key shareholders or members of management into that project?

How do shareholders agreements impact the bankability of a project?

TM: The starting point in our bankability analysis for a project is, can we as a lender take security over the project’s assets, including the actual shares in the company executing that project? Very often they’re certain mechanisms, such as rights of pre-emption, that could potentially frustrate our ability to take effective security and also enforce security over those shares. One thing we’re currently working through at SunFunder is local content, where there is a jurisdiction requirement to have a local shareholder as one of project owners. A very important question we are asking ourselves is, if we one day have to take over the project, are we confident we can work with the local partner or find another in time to hold shares alongside us?

Another important aspect of the bankability analysis is capital structure. We’ve recently been looking at a project with lots of capital from shareholders, and which on the face of things seemed fine. But when we dug into the structure, we realised the equity was mostly injected by way of shareholder loans. When we then started looking at the shareholder loans as debt rather than equity, we saw the company was actually thinly capitalised and possibly in danger of being insolvent. This highlights the importance of thinking about capital structure really early on in the bankability analysis.

Lastly, we need to balance the sponsor’s desire to have flexibility to cash out and bring in other people with our own preference to partner alongside the sponsors. From the lender’s point of view, we want the sponsor to remain committed to the project, not just because of their deep pockets, but because of their technical expertise and the impact they’re having in that particular jurisdiction. This requires some measure of restriction on the sponsor’s ability to sell their stake in the project, while offering them some of the flexibility they are looking for. It’s a really interesting discussion. 

How do you feel that lender step-in rights work as part of shareholders agreements vs having overarching direct agreements etc.?

TM: Put simply, if I am stepping in as a lender I want to take control of the company and don’t want to be restricted by the shareholders agreement. So, in that situation the shareholders agreement is actually a bad thing for the step-in lender.

This is topical for us at SunFunder right now, where we’ve been working on projects where it’s been very difficult to get a direct agreement. So, one approach we’re working through is the process of the lender stepping in indirectly via their shares. So if there is an enforcement event and the lender forecloses on the shares they hold as security, they would effectively become the de facto owner of the project and everything owned by the project. 

In that instance, the lender would ideally want to disapply all of the restrictions of the shareholders agreements – such as rights of pre-emption and so on. This means it’s really important early on in the bankability analysis to dis-apply those restrictions, which requires special resolutions and amendments to corporate documents and the shareholders agreement to allow the lender to effectively take over that project.