By Faith Sing and Kelvin Ho
Various venture capital (VC) associations have published template documents to help start-ups and venture capital investors document their funding deals.
The common thought has been to seed an industry standard that might reduce the time, effort and costs of negotiating such arrangements.
We took a closer look at shareholder arrangements published by:
- the United States based National Venture Capital Association,
- the British Venture Capital Association,
- the Australian Private Equity & Venture Capital Association, and
- the Singapore Venture Capital & Private Equity Association.
Interestingly, they’ve all come up with different suites of documents with different provisions. Not all of these differences are jurisdiction specific.
However, there are some key control concepts that are common to all four of them. These are the key control concepts your shareholders’ agreement should contain.
Concept 1 – Determine how control and influence is to be exercised at the board level
The board of the company is usually responsible for managing, directing or supervising the business of the company.
In addition, directors are likely to receive better access to management and information and the board or a director may more easily call shareholders’ meetings.
All four sets of VC association shareholder arrangements contained provisions on how the board is to be constituted, that is:
- who may appoint and remove directors to and from the board, and
- the size of the board.
Coupled with an express or assumed requirement that board decisions are taken by majority vote, these provisions generally determine the balance of control and influence at the board level.
Investors making a material investment will typically want to have some form of representation on the board. Founders will also want to retain their control and influence at this crucial level.
The portion of the board reserved for each group is unlikely to strictly reflect their relative shareholdings. It may be driven by their relative bargaining power, how comfortable a major shareholder may feel with other major shareholders and a wish to avoid an unwieldy board.
Concept 2 – Determine if there are some board decisions which are so important that special voting thresholds are required
Related to Concept 1, it may be that investors, founders and other shareholders find it easier to compromise on who sits on the board and their relative voting power on the board if certain key decisions are only made with their input.
The board typically requires only a simple majority for approval of matters before it. That is, at least 50% of the directors present and voting must have voted in favour of the resolution.
All four sets of VC association shareholder arrangements include options for a higher threshold in relation to certain matters such as:
- making loans or advances or incurring a debt in excess of a specified amount or outside the ordinary course of business,
- appointing, terminating or amending the terms of engagement of executive officers, and
- making a material change in the company’s business.
The list of matters that might be reserved for these special thresholds and the special threshold itself will vary.
This is an area in which working off a sub-optimal precedent may lead to complications in the long run:
- You may not have a comprehensive list of possible reserved matters which you may consider for inclusion or deletion,
- The draft may describe these poorly so that the company can’t move forward in critical situations because of broad vetoes or investors or other shareholders aren’t protected in the manner they had intended.
Concept 3 – Determine if there are some shareholder decisions which are so important that special voting thresholds are required
Similar to considerations at the board level, you will also want to consider carefully the voting thresholds that apply for shareholder matters.
If you do not specify special rules, some of these shareholder matters:
- may be approved by shareholders holding 50% or more of the voting rights,
- may be approved by shareholders holding 75% or more of the voting rights, or
- may not require shareholder approval at all.
Three out of the four sets of VC association shareholder arrangements set out a list of matters which may only be undertaken with approval of the investors. The list includes matters such as:
- variation of share rights, and
- amendment of the company’s constitution.
Where there are a number of investors, unanimous approval of all investors may not be appropriate. Requiring unanimous approval means that the investor with the smallest shareholding has an effective veto over the wishes of everyone else in that group.
As with Concept 2, it is important to carefully craft the specific matters to include as reserved matters deserving of a special voting threshold. You will want a well drafted and comprehensive list of such matters to help you consider what to include or exclude.
In addition, shareholders and their advisors will want to consider their requests in light of general corporate law rules such as:
- rules on obtaining the requisite shareholder approval for certain corporate actions, and
- directors duties and whether it may be more appropriate for some matters to be dealt with as board reserved matters.
There are a number of common concepts in the shareholder arrangement documents published by four respected VC associations. We’ve explored just 3 in this article.
There are also good lessons from exploring the differences. These differences add to the ‘tool-box’ you might draw from:
- in proposing your first draft agreement, and
- in proposing solutions that might break deadlocks in your negotiations.
Read more on our analysis of the NVCA, BVCA and AVCAL model documents including on:
- similarities on transfer of shares provisions in shareholders’ agreements – 5 key concepts on transferring shares under a SHA
- different options on board control provisions in shareholders’ agreements – 5 key options for board provisions in a SHA
- different options for pre-emptives on transfers – 5 key options for pre-emptives on transfers in a SHA
- different options for drag-along provisions – 5 key options for drag-along provisions in a SHA
You may also be interested in our thoughts on:
- Singapore model documents – VC model documents for Singapore
- choosing a template agreement – 6 tips for picking a template agreement
Get in touch to explore how we may help you with your shareholder arrangements.
fsLAW is a boutique business law firm group providing legal solutions and advocacy for clients in the Asia Pacific region from Singapore. We provide our services through retainers as well as in the traditional way of an hourly or daily rate or fixed-quote for projects. We provide both Singapore law advice as well as advice on the laws of NSW, Australia, through our two law firms.
This article is provided for general information purposes only and does not constitute legal or other professional advice. Legal services are only provided to clients under an engagement letter. Other communications do not give rise to a solicitor-client relationship or constitute the provision of legal services.