The British Private Equity & Venture Capital Association (“BVCA”) has published a revised set of draft model documents (“Draft Documents”) for early stage investments for consultation purposes with a view to creating a more standardised set of precedents.
The BVCA is concerned that the industry is suffering from a lack of standardised venture capital documents enjoyed by investors and entrepreneurs in jurisdictions such as the United States. They argue that such documents save time and money and ensure that key issues can be dealt with against a familiar background of legal terms.
The Draft Documents are based on the BVCA’s existing suite of model documents (first produced in 2006 and updated in 2010) which have been updated by leading venture capital investors and the legal community in an attempt to make them more attractive and versatile.
The BVCA invited interested parties (for example entrepreneurs, angel investors, venture capital firms, corporate venture capital investors and advisors) to review the Draft Documents and feed back with any comments, insights and ideas to help improve the documents to make them as clear and as flexible as possible.
In summary, the BVCA have proposed the following key changes to the current model documents:
Articles of association (“Articles”)
- Purchase of own shares: a company may purchase its own shares with cash to the extent permitted by section 692(1)(b) of the Companies Act 2006 (article 3.6).
- Treasury shares: the Articles include restrictions on the Company’s exercise of rights in respect of treasury shares held (article 3.9) and also address the treatment of treasury shares in respect of anti-dilution (article 10.4), allotments and transfers (article 13.9 and 15.13), the valuation of sale shares (article 17.3(d)) and drag-along provisions (article 22).
- Convertible shares: the applicable conversion ratio for convertible shares may be adjusted in the event of a consolidation or sub-division of shares, or a capitalisation of profits or reserves (articles 9.8 to 9.11).
- Pre-emption rights: another fund in an investor's group may take up the investor's pre-emption rights on an allotment (article 13.8) or transfer (article 16.9) of shares.
- Optional bad leaver provisions: shares held by a founder or an employee may automatically convert into deferred shares in the event that they are a bad leaver (articles 19.1 and 19.2).
- Preference and special dividends: the Articles contain new provisions regulating the payment of special dividends in relation to certain transactions including licencing agreements and asset transfers and provisions dealing with the calculation and the payment of dividends on fixed coupon preference shares (Appendix A). The BVCA has stated that the proposed wording is to be reviewed in light of accounting treatment.
- IPO preference: the Articles deal with the issue of ordinary shares to existing preference shareholders on an IPO (Appendix B).
- Anti-dilution protection: once the Articles are finalised, the BVCA intends to create an alternative precedent with anti-dilution protection on a conversion basis for US investors.
Subscription and shareholders’ agreement (“SSA”)
- Staged investments: if an investor does not subscribe for further shares on a staged investment, the other investors will be given the option to subscribe for those shares and the shares currently held by the defaulting investor will be deemed to convert to ordinary shares (clause 5.5).
- Treasury shares: the SSA addresses the treatment of treasury shares in respect the transfer of shares (article 14.2) and variation and termination (article 24), and requires investor majority consent in relation to the holding, disposal or cancellation of treasury shares (paragraph 3, Part 1 of Schedule 6).
- Warranty claims: the SSA includes optional provisions allowing founder shareholders to transfer an adequate number of their shares in satisfaction of an investor warranty claim (clause 7.10).
- Vesting: a share option plan shall provide that option shares shall vest in accordance with a prescribed vesting schedule except with the prior approval of the board (including investor director consent) (clause 8.2).
- Intellectual property: any intellectual property created by a founder in connection with the company’s business must be disclosed to the company and steps must be taken to transfer ownership of all rights, title and interest in such intellectual property to the company (or its nominee) (clauses 15.4 and 15.5).
- Confidentiality: investors must ensure that their nominated directors and observers comply with applicable confidentiality provisions (clauses 16.2 and 16.3).
- US securities laws: optional investor warranties and undertakings for US investors have been inserted concerning possible implications under the United States Securities Act of 1933 and other US securities legislation (clause 38).
- Anti-corruption: the SSA contains undertakings concerning the company's continued compliance with anti-corruption legislation (paragraphs 9 to 11 of Schedule 7).
- Warranties: various warranties set out in Part 1 of Schedule have been extended, including warranties in relation to IT systems and software (paragraphs 10.16 to 10.20), pension schemes (paragraphs 13.7 to 13.12), data protection (paragraph 14.6) and state funding (paragraph 14.7). Environmental warranties have been removed (paragraph 9).
- Execution: the BVCA are seeking counsel’s opinion on whether the model SSA should be signed as a deed or as an agreement. An optional provision specifying the consideration given by the investors for the founders' obligations has been inserted which should be included in the event that the SSA is executed under hand (clause 31).
Following the BVCA’s consultation, a seminar will be held to allow further discussion, feedback and queries with the aim to publish the templates formally in April 2014.