Venture Capital Investment Model Agreements

By Ken Cheung, Mark Low

01-2019

This is an update on a previous article we published in November last year on the Venture Capital Investment Model Agreements ("VIMA"). The launch of the VIMA is to facilitate early stage financing transactions in Singapore. To read the full article, click here.

The Venture Capital Investment Model Agreements ("VIMA") were introduced by the Singapore Academy of Law ("SAL") and the Singapore Venture Capital and Private Equity Association ("SVCA") in October 2018 as a response to the rapid growth of VC and PE investments in Singapore and South East Asia.  According to the SVCA, venture capital investments into Southeast Asia totalled US$2.7 billion in 2017 and $3.2 billion in the first 8 months of 2018.

Purpose of VIMA

The aim of the model agreements is to reduce the need for companies to spend time and money on preparing and negotiating venture capital investments from scratch, particularly in the early stages of financing. The documents have been prepared by a committee comprised of leading legal practitioners, investors and financiers.

According to the Chief Justice Sundaresh Menon, the VIMA initiative "complements our national efforts to foster the growth and vibrancy of the venture capital eco-system in Singapore".

What VIMA comprises of

VIMA comprises the following documents:

  • Venture Capital Lexicon
  • Non-Disclosure Agreement
  • Convertible Agreement Regarding Equity ("CARE")
  • Term Sheet
  • Short Form Term Sheet
  • Subscription Agreement
  • Shareholders' Agreement

Subscription Agreement

What other investors (apart from the lead investor) may consider?

There are several clauses which require the lead investor's approval or are beneficial to the lead investor:

  • Clause 2.2.2 of the Subscription Agreement provides that:

    "the Company shall deliver to each Investor a copy of the written resolutions passed by the Board, in a form approved by [the Lead Investor] …"

  • Clause 2.2.3 of the Subscription Agreement provides that:

    "the Company shall deliver to each Investor a copy of the written resolutions passed by the Shareholders, in a form approved by [the Lead Investor] …"

  • Clause 10 of the Subscription Agreement provides that:

    "The Company shall pay at Completion all legal, accounting and due diligence fees and disbursements of [the Lead Investor] in relation to the negotiation, preparation, execution, performance and implementation of this Agreement…"

  • Clause 14.11.5 of the Subscription Agreement provides that:

"Any reference to a document being "in the agreed form" is to a document in a form agreed between the Company and [the Lead Investor]…"

The lead investor has a lot of control over the form that the documents should take, including documents that are in agreed form and the form of the board and shareholders' resolutions.

The other investors may wish to have the above clauses amended to provide that shareholders and board resolutions as well as the documents that are in agreed form also need to be approved by them. This is to ensure that they have a say in the form of such documents. The other investors may also consider having their legal, accounting and due diligence fees covered by the Company.  If not, then only the lead investor will be reimbursed for its fees by the company, up to a certain threshold.

Shareholders' Agreement

Will the investors face the risk of the board transacting business without their consent?

The Shareholders' Agreement clauses provide:

1.4.3 The Company shall send to the Investors, each Investor Director [and each observer appointed by the Investors] (in electronic form if so required):

  1. reasonable advance notice of each meeting of the Board (being not fewer than [five] Business Days), such notice to be accompanied by a written agenda specifying the business to be discussed at such meeting together with all relevant papers; and…
Save with Investor Director Consent, no business that is not specified in the agenda referred to in Clause 1.4.3 shall be transacted at any meeting of the Board." The above clause provides that investors and the directors which they appoint have to be given reasonable notice of board meetings and they also need to be informed of what is going to be transacted at such board meetings. Investors have very limited risk of the board transacting business without their consent as items that are not specified on the agenda cannot be passed by board meetings that are not approved by the all or a certain number of the directors that are appointed by the investors, depending on how Investor Director Consent is defined. Other issues that investors may consider

The British Private Equity & Venture Capital Association's ("BPEVCA") Subscription and Shareholders' Agreement contains clauses that provide that:

Intellectual property

14.3 Any discovery, invention, secret process or improvement in procedure made or discovered by any Founder while in the service of any Group Company or while a shareholder in the Company in connection with or in any way affecting or relating to the Company’s business or capable of being used or adapted for use in or in connection with the Company’s business shall as soon as reasonably practicable be disclosed to the Company and shall belong to and be the absolute property of the Group Company which the Company nominates for the purpose. For the avoidance of doubt, this agreement shall not operate as a transfer instrument and any transfer of Intellectual Property rights shall be effected under a separate agreement.

14.4 Each of the Founders (whether before or after his ceasing to be a Shareholder in the Company or his ceasing to be an employee or engaged as a consultant of any Group Company) shall at the expense of the Company or its nominee apply or join in applying for patent or other similar protection in the United Kingdom, the Republic of Ireland or any other part of the world for any such discovery, invention, process or improvement as referred to in clause 14.3 and shall execute all instruments and do all things necessary for vesting those letters patent or other similar protection when obtained and all right and title to and interest in them in the Company (or its nominee) absolutely and as sole beneficial owner.

The VIMA Shareholders' Agreement does not contain an equivalent clause that the BPEVCA model Subscription and Shareholders' Agreement contains. The investors can consider including a similar clause in their Shareholders' Agreement. The investors could have invested in the company because the founder is creating a "discovery, invention, secret process or improvement". Such inventions should vest in the company as they could be valuable to the start-up. The BPEVCA model Subscription and Shareholders' Agreement also has a clause that provides that the founder upon ceasing to be a shareholder or consultant, as the case may be, has to transfer the patent to the company. The investors could consider including a similar clause in their Shareholders' Agreement as these patents would most likely be an asset to the company.

 

Convertible Agreement

 

Will investors be prejudiced by subsequent CARES of the company?

The CARE has a clause that provides that:

If the Company issues any other CARE Document prior to termination of this CARE, the Company will promptly provide the Investor with written notice thereof, together with a copy of all documentation relating to such CARE Document and, upon written request of the Investor, any additional information related to such CARE Document as may be reasonably requested by the Investor.  In the event the Investor determines that the terms of such CARE Document are preferable to the terms of this CARE, the Investor will notify the Company in writing. Promptly after receipt of such written notice from the Investor, the Company agrees to amend and restate this CARE to be identical to the subsequent CARE Document.

Investors will not be prejudiced by subsequent CARES of the company due to the clause above as this provision enables such investors to demand the same rights if such subsequent CARE have been terms that they have been given.

Even though the VIMA takes into "account the interests of founders and investors in a balanced and pragmatic fashion"[1], investors should consider amending the terms of the various documents to suit their needs and can consider including clauses that are otherwise not contained in the VIMA that are beneficial for them.

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. 


[1] SAL and SVCA.