On 23 October 2018, the Singapore Academy of Law’s Promotion of Singapore Law Committee and the Singapore Venture Capital & Private Equity Association jointly launched the Venture Capital Investment Model Agreements ("VIMA") to facilitate early stage financing transactions in Singapore.
The VIMA represent a set of model contracts targeted for use in pre-Series A and Series A financing rounds and comprise the following documents:
- Series A Term Sheet (long form / short form)
- Series A Subscription Agreement
- Series A Shareholders' Agreement
- Non-disclosure Agreement
- Convertible Agreement Regarding Equity (for pre-Series A)
The VIMA are largely Singapore-focused documents (e.g. agreements that incorporate Singapore governing law and dispute resolution and are intended for Singapore-incorporated private companies) and include explanatory notes to assist users in customising the documents.
The launch of the VIMA represents a positive step in fostering the growth of early stage financing in Singapore and follows in the footsteps of other major jurisdictions such as Australia (Australian Private Equity & Venture Capital Association Limited) and the UK (British Private Equity & Venture Capital Association) which have also released similar model documentation for use in early stage financing.
Comments on the VIMA
In order to accelerate the negotiation process and reduce transaction costs, the provisions in the VIMA are meant to generally reflect industry norms and provide a balanced starting point for parties to commence investment discussions. This allows parties to focus on certain key deal-specific issues and come to an overall agreement more quickly.
However, although the VIMA are generally fairly neutral, users (especially founders) will still have to be careful when using the VIMA as certain provisions allow for the parties to have the flexibility to select between options, with options on one end of the spectrum favouring the investors at the expense of the founders.
Clause 4.1: Joint and several liabilities
"The Warrantors [jointly and severally] / [severally and not jointly] warrant to the Investors that each and every Warranty set out in Schedule 4 is true, accurate and not misleading at the date of this Agreement."
The choice between "jointly and severally" and "severally and not jointly" may have serious implications on each founder and his or her liability for any breach of warranties.
Several liability arises when two or more persons make separate warranties to another party. With several liability, each party is only liable for its own warranties and if a party's warranty is not accurate, the responsibility (and liability) does not pass to other parties.
On the other hand, joint liability arises where two or more persons jointly warrant to do the same thing. With joint liability, each of the parties is fully liable for the accuracy of the relevant warranty.
Joint and several liability is a hybrid of the two; where two or more persons jointly provide the warranties and also severally make separate promises. Under a joint and several approach, if one of the warrantors were unable to pay its proportional liability on account of a breach of warranty, the other warrantor would be jointly liable for the shortfall.
Therefore, from a founders' perspective, it may be onerous to provide for joint and several liability as a founder may not wish to run the risk of assuming the entire liability for a breach of warranty should the other founder be unable to pay.
Clause 4.8: Indemnity for breach of warranty
"The Warrantors hereby covenant with each Investor to indemnify and save harmless such Investor from and against any and all Losses which such Investor may at any time and from time to time sustain, incur or suffer as a result of or arising out of any breach of any Warranty."
There are certain differences between a breach of a warranty and an indemnity that might make this clause particularly onerous to the warrantors / founders. It is commonly perceived that a claim under an indemnity is a claim for a debt as opposed to a claim for damages for breach of contract. A claim in debt provides the indemnified party with some substantive and procedural advantages that do not apply to a claim for damages for breach of contract. For example:
- in an action for the recovery of a debt, the plaintiff only needs to establish that the event triggering the obligation to pay the sum sought has occurred. In an action for damages for breach of contract, it is up to the plaintiff to establish that both a breach of contract has occurred and that the damages being claimed have in fact been suffered; and
- in an action for damages for breach of contract, the plaintiff will not be able to recover loss to the extent that it has not taken reasonable steps to mitigate its loss. It will also not be able to recover loss that the law considers to be too remote. These rules of mitigation and remoteness do not apply to an action for the recovery of a debt.
To put in plainly, an indemnity for a breach of a warranty may increase the quantum of the warrantor / founder's liability and will also make a claim easier to enforce. Therefore, the inclusion of this indemnity may substantially increase the risk for the warrantor / founders for any warranty breaches and should preferably be resisted (or at least limited to only specific known risks that the warranty regime does not provide adequate cover).
Paragraph 3.3 of Schedule 4: Disclosure of all material issues
"All information about the Subscription Shares and each Group Company's business which might be material for disclosure to a buyer of the Subscription Shares has been disclosed to the Investors in writing".
The inclusion of this warranty may be onerous to founders and warrantors and should be resisted as they are not in a position to determine what other information about the shares and the company's business the investor would require or what has influenced the investor to subscribe for shares in the company.
This type of warranty might be suitable where no due diligence has been conducted by the investor. In circumstances where the investor has been allowed to conduct due diligence, founders and warrantors should question whether such a warranty is appropriate.
Overall, the VIMA provides a useful starting point for parties to commence investment negotiations. However, as highlighted above, certain provisions may not necessarily reflect a balance of interests between investors and founders.
It is interesting to note that, in relation to clause 4.1, the corresponding clause in the UK model subscription agreement only provides for several liability to be adopted; whereas in relation to clause 4.8 and paragraph 3.3 of Schedule 4, the UK and Australian model subscription agreements either do not include such an indemnity and warranty or they indicate that such a position is optional and up for negotiation.
Finally, investors have been known to deal with some of these issues by including references to joint and several liability, indemnity for breach of warranties and material disclosures in term sheets. Often these term sheets are negotiated and signed before founders involve their lawyers and if these concepts are agreed during the term sheet phase of negotiations, trying to wiggle out of these positions when the parties negotiate the subscription agreement can be difficult.
This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please contact our lawyers if you have any specific queries.