The “Manner of Use” clause
Most investment agreements and subscription of capital agreements allow investors to expressly provide how their invested capital is to be utilised by the target company (via a “Manner of Use” clause) or require the target company to state how it will use the investment monies (a “Manner of Use Document”). A difference between the investor's intentions and the company's use of investment monies gave rise to the dispute in the recent case of Tembusu Growth Fund Ltd v Actatek, Inc and others  SGHCR 2.
This case emphasises the importance of ensuring that both the Manner of Use clause and the Manner of Use Document (if such a document is utilised) are recognised as integral to the investment agreement. Proper integration will prevent the company from using the investment monies for purposes outside the investor's intention. This is particularly important when venture capitalists and fund managers are not involved in the daily operations of the company and may not be able to actively monitor the use of funds by the company and its management.
Background to the dispute
Tembusu Growth Fund Ltd (Tembusu) agreed to invest S$1.5 million in Actatek, Inc (Actatek) and entered into negotiations with Actatek over a convertible loan agreement (Agreement) for that purpose. The emails exchanged between the directors of Actatek and officers of Tembusu during the course of negotiations (which were excerpted in the grounds of judgment) showed attempts by the Actatek directors to include payments to themselves in addition to the original terms of the investment.
The High Court accepted that Tembusu had sufficiently disagreed with such attempts before the Agreement was concluded and noted that the purpose of Tembusu's investment was to keep the Actatek group "functioning as a going concern, to facilitate expansion and restructuring of the group and to ensure that it had sufficient funds to achieve listing"; a purpose familiar to various venture capitalists.
When the Agreement was concluded, it contained a condition to the release of investment monies: the Manner of Use clause. This clause required Actatek to deliver a Manner of Use Document detailing how it will use the proceeds of the investment and an execution plan for its expansion.
According to the Manner of Use Document drawn up by Actatek, Tembusu's investment would be used generally in “Sales and marketing expenses, R&D expenditure, IPO, and Working Capital". However, Actatek used some of the investment monies to repay monies owing to its directors.
When Tembusu discovered this, it commenced a summary judgement action which was heard before an Assistant Registrar of the High Court.
Arguments before the court
The Agreement contained a common boilerplate - the ‘Entire Agreement’ clause. This was worded such as to cancel “all previous representations, warranties, agreements and understandings between the Parties with respect to the subject matter”.
While both Tembusu and Actatek agreed that it was a condition precedent of the Agreement for Actatek to deliver the Manner of Use Document, they could not agree on whether it was a condition that Actatek abide by the uses stated in that document.
It was Tembusu's contention that the terms of the Agreement could be implied, if not expressly provided, to require Actatek to abide with the Manner of Use Document. Tembusu believed that by making payments to its directors from the investment monies, Actatek had departed from the Manner of Use Document and thus Actatek had breached the Agreement.
Actatek however claimed that there was no provision in the Agreement limiting its use of the proceeds and even if there were such a limiting condition, it believed it had not deviated from the Manner of Use Document.
The High Court had to specifically determine two issues:-
- whether the entire agreement clause in the Agreement can be interpreted to exclude the uses stated in the Manner of Use Documents as terms of the Agreement; and
- whether a term could be implied in the Agreement that proceeds from the investment could only be used in the manners specifically stated in the Manner of Use Document (unless otherwise agreed by Tembusu).
Was "Manner of Use" a term of the Agreement and did parties have to abide by the Manner of Use Document?
The Assistant Registrar found that the way the entire agreement clause was drafted did not successfully exclude terms from being implied into the Agreement.
He referred to an example of an entire agreement clause in Ng Giap Hon v Westcomb Securities Pte Ltd and others  3 SLR (R) 518 (Westcomb Securities) that expressly excluded implied terms:-
“Entire Understanding: This Agreement embodies the entire understanding of the parties and there are no provisions, terms, conditions or obligations, oral or written, expressed or implied, other than those contained herein. All obligations of the parties to each other under previous agreements ([if] any) are hereby released, but without prejudice to any rights which have already accrued to either party.” [emphasis in original]
The Assistant Registrar compared the above example with the clause used in Tembusu and Actatek's Agreement:-
“Entire Agreement: This Agreement embodies all the terms and conditions agreed to by the Parties and supersedes and cancels all previous representations, warranties, agreements and understandings between the Parties with respect to subject matter herein whether such be written or oral.”
In that regard the Assistant Registrar found the entire agreement clause in Tembusu and Actatek's Agreement did not contain such "clear and unambiguous language" so as to exclude implied terms, which the entire agreement clause in Westcomb Securities did by making explicit reference to the exclusion of any implied terms.
Turning on the interpretation of the entire agreement clause in the Agreement, the circumstances and context of the negotiations and the contract, it was found that the Manner of Use Document was, by implication, part of the Agreement. On this reasoning, the High Court found it to be an implied condition of the Agreement that the investment monies be used only in accordance with Actatek’s stated uses in the Manner of Use Document and consequently that payment of the salaries of Actatek’s directors was a breach of that condition.
The Assistant Registrar further found that the Manner of Use Document was not just descriptive but rather prescriptive. Actatek was bound to use the investment monies in accordance with the Manner of Use Document. Unlike an ordinary lender, the interest of a venture capitalist such as Tembusu in a target company is to sustain and grow the company's business and in Actatek's case, to list on the stock exchange after which Tembusu would convert its loans into shares. Tembusu therefore had a direct interest in the use of the investment monies.
The takeaway for investors to control use of invested funds
In order to avoid disputes and arguments similar to Tembusu and Actatek's, investors (and lawyers) may find it prudent to detail the specific manner in which investors intend for their target companies to use the investment proceeds. They can do this via express provisions in the investment agreement, either by incorporating a list of uses within the main agreement or by express reference in the main agreement to an annexure detailing the manner of use (i.e. a Manner of Use Document).
The investor can also strengthen its position with a clause providing that such a list of uses is exhaustive and that the proceeds may not be used for any other purpose except with the investor’s consent. For example, the investor could consider stipulating that the invested funds will be used specifically for expansion to other regions or purchase of capital equipment and not, unless otherwise agreed or with the investor’s consent, be used to repay certain debts or redeem shareholders’ loans.
On its part, a target company should clarify with its investors any doubts it may have in the use of such funds, as the purpose it envisions or manner of use that it contemplates may not be all encompassed in general "Working Capital" statements as is often provided in investment agreements.