Investment Agreement lawyers

Whether you need an investor agreement for a small or large investment, a one-off or a series of investments, we bring experience and expertise.

It is taken as read we can deal with the contract and supporting legal documentation but what we can also offer is guidance on how to maximise the commercial and tax position.  Supporting companies and investors over the years has created the knowledge you need.

Please do call us to discuss how to structure of your investment. We are always happy to provide an estimate of likely costs.

Structuring the equity investment

Methods of investment vary, possibly involving equity investment, debt or a combination of the two. Each method has benefits and disadvantages along with tax considerations.

The agreement reached will depend on negotiating positions and factors will typically include the attractiveness of the business, inherent and specific risks with the business, the amount being raised and the equity which is being offered and the likely rate of return. Our job is to take you through the risks to protect the investment and make sure the governance works to achieve your goals.

An investment can involve a fusion of:

• Ordinary shares;
• Preference shares;
• Convertible loan notes;
• Debt; and
• A charge over assets which can be very helpful if there is commercial property.

The rights attaching to any class of share must be set out in either the articles, shareholders agreement or an investment agreement.  If preferences are not agreed the investor will be treated in the same way as ordinary shareholders.

Ordinary shares

In many companies, the ordinary shares carry the right to vote, receive dividends and a return of equity on a sale, liquidation or winding up.  If an investor requires added rights ordinary shares can be issued along with preference shares.  The idea is that the preference shares provide benefits for investors over and above the rights attaching to the ordinary shares. Similarly different rights can be given to shareholders in family investment companies. Often the older generation want to retain control of management whilst younger members of the family learn the trade.

Preference shares

Preference shares usually entitle the preference shareholder to:

• A right to first distribution: this will improve the chances of recover value;
• Preference shares can carry a right to interest on the investment - known as the coupon rate; and
• A conversion option to ordinary shares, so gaining more equity upside on an exit event.

Typical investment agreement terms

The investment agreement should consider:

• Matters requiring investor approval;
• The level of control an investor can exercise;
• The who can control the board;
• Level of warranties given by the investee company; and
• What happens if the a shareholder wants out. This is of relevance with family investment companies where the older generations are usually seeking to preserve wealth for next generations.

Who has control?

Protection will be enhanced if major decisions require approval - this is known as a power of veto. Options to consider include who can influence decisions around:

• Significant acquisitions and disposals.
• Dividend declaration and payment.
• Material changes to the company’s business model.
• Significant investments and/or future fund raising.
• Long term or unusual contractual commitments.
• Will an investor representative have a seat on the board. The constitution of the board can be set down in the investment agreement (or shareholders' agreement). It is not uncommon for an investor to be granted the right to appoint a non-executive director. For example, in a technology company, the investor may seek to appoint an individual that has industry experience in launching products and taking them to market. That will help in realising a return.
• Often in family investment companies voting rights are not equal to preserve control within the family.

Further rounds of financing

Further investment brings dilution of share capital and often attempts of new larger investors to take control.  The influence the investor retains will depend upon the size of investment, value of the company for new finance rounds and terms set out in the investor agreement.

Future planning can leave the early stage investors in a stronger position.

Access to management information

The starting point is that shareholders have no right to management information. Therefore, information rights have to be set out in the investment agreement. Shareholder protection may include the right to see:

• Business plans;
• Management accounts;
• Budgets;
• Board papers.

Contractual protection via warranties 

Generally, it’s the investee company, the founders and directors who give the warranties. We can help you decide who should give warranties and the terms.

Common limitations on the warranties which may require negotiation include:

• The time period during which the investor can bring claims;
• The investor’s knowledge, whether implied or express;
• A cap on the total amount of warranty claims;
• A cap on any director's liability. For example a limitation of three times salary or remuneration or a de minimis level that must be reached before the investor can claim.

Investor exit plan

On the way in an investor needs to think of the way out. Investment terms should deal with:

• Will the investor be entitled to sell shares before a trade sale?
• Will the investor be required to first offer shares to the company, or existing shareholders pro-rata?
• What price will the shares be sold for? Will there be a distinction in price for a “good leaver”, and “bad leaver”?

 The questions have intensified as the average time it takes to build a business and achieve a trade sale is increasing. Within family investment companies good governance is so important to keep the business on a level ground.

Protecting the business under the investment agreement

A well thought through investment agreement will consider how to:

• Protect confidential information -discussions with investors involving trade secrets and confidential information should take place under a confidentiality agreement. That will create a deterrent at the very least. This is in the investor's interest as well as the company's as you may not want other investors to know you are in talks.
• Heads of terms time and money is saved if heads can be signed setting out the framework.
• Incentivising the management team.
• Exclusive negotiating period - placing time limits on decisions can focus the mind.
• Is the investment conditional? - Typical conditions include the investee company’s directors signing new service agreements, approved by the investors, technology and IP protection or appointment of non executive directors.
• Restrictions on the investor - investors along with staff can damage the business by taking ideas to set up in competition.  The investee business should consider putting some anti competition terms into the investment agreement to protect other investors and the business. There are no implied duties on investors.  That means any restriction has to be documented and agreed in advance.

Each investment differs. However, from our experience we will know what conditions are required, and what are reasonable.

Is shareholder approval required?

Commonly, approval is required to increase share capital and amend the investee company’s articles of association. Articles of association are often drafted to compliment the investment agreement.

Special considerations for investment into technology and IP businesses

Part of the legal due diligence is to ensure the company owns the technology and intellectual property it claims to have invented or own. Issues often arise during the intellectual property due diligence.  If they can be sorted out pre-investment this prevents “surprises” at a later date when the business may have been a success and the stakes are higher. For instance, sometimes the company thinks it has acquired its IP rights from a previous venture, but doesn’t have complete ownership.