If the company fails to comply with impact commitments, the investor can require the company to repurchase (redeem) the investor’s shares. The parties will need to define what actions or failures trigger the redemption, and the specific terms of the redemption right, including price. A foundation PRI investor, for example, may require the company to redeem its shares if the company changes its corporate purpose or if the company fails to comply with specified social or environmental objectives. Because of the potential severity of a redemption remedy, investors will likely use it as a last resort only after dialogue has failed.
For more on redemption price and terms, see Equity redemption and dividend. US investors will want to carefully consider potentially unfavorable tax treatment that could result from a structure that incorporates a redemption feature, see Section 305 Rules. See Sample term sheet: impact equity earnback for an example of terms that force the repurchase of investors’ shares.
Sample language for forced repurchase
As long as any of the Preferred Shares remain outstanding, if [specify the redemption trigger], the Investor may require redemption of [all or any portion of the Preferred Shares held by the Investor] OR [all but not less than all of the Preferred Shares].