If a holding company is incorporated in another state, investors have the option to apply for reinstatement as a Delaware Corporation. Among the advantages of reinstatement (apart from the usual advantages, such as established business law and familiarity with investors), there is the possibility of making a fresh start with company documents (charter, company protocols, stock issues, etc.) to replace insufficient or incomplete incorporation documents (this requires cleaning up the original incorporation documentation in order to be able to carry out the reinstatement). however, leads to new own corporate documentation). Any necessary stock splitting may also occur as part of the reinstatement (usually through a merger into a newly organized Delaware corporation). In addition, in states like Massachusetts, where the cost of a one-time filing fee for approving a large number of shares that are typically required as part of a venture capital transaction is high, the cost of reinstatement is often offset by the savings that result from avoiding these fees. In the future, the Company will benefit from the ability of shareholders of a Delaware corporation to take steps to approve future financing and other significant securities transactions through the written consent of majority shareholders (with non-voting shareholder notice), rather than unanimous approval (as required by the laws of some states) or the need to convene and hold a shareholders` meeting. The voting agreement is a document that sets out the requirements for how certain shareholders must vote with their shares in certain circumstances. A voting agreement sometimes includes a «drag right» that essentially causes minority shareholders to vote on a particular issue (i.e., a liquidity event) in the same way as the majority. One of the company`s main goals behind implementing a voting agreement is to simplify the management of shareholder voting in the future. The term sheet is a non-binding document that specifies the conditions under which the fund manager (also known as general partner or «GP») agrees to invest in the Company. In the term sheet you will find provisions such as the size of the investment, the pre-monetary valuation of the company, as well as important economic and control conditions.
The term sheet serves as the basis for the preparation of the remaining documents (sometimes referred to as «final agreements» of the cycle). It is customary for the parties to refer to the intentions set out in the condition sheet during the negotiations on these final agreements. Many critics believe that registration agreements are a general waste of time, given the likelihood that shares issued in a venture capital transaction will normally be held longer than the two-year period set out in Rule 144, and the fact that the underwriter will most likely determine in a subsequent IPO or public offering, who may or may not participate in a public offer. The other side of the argument is that registration fees may have value for a shareholder after an IPO, particularly for an affiliate that remains subject to the volume restrictions of Rule 144, or for the holder of a large block of shares that can only be sold with the help of a broker-dealer. A middle ground in an undergraduate cycle is not to provide for full registration fees, but to require that investors be included on an equal footing when registration rights are subsequently granted to others, or to require that standard registration fees be granted later at the request of a certain percentage of investors` interest. The place for ongoing commitments such as information rights, voting rights agreements, etc. is in the Investor Rights Agreement or other similar agreements entered into in connection with the transaction and not in the share purchase agreement itself. Once the transaction is completed, the share purchase agreement must be historical.
The current investor rights agreement and other arrangements can then be adjusted in subsequent cycles to incorporate the terms of subsequent transactions or to include new investors without the need to review and amend the share purchase agreement for each previous round and for each of the previous investors. Another important point is that the right of first refusal to participate in future stock offerings should be limited to former investors who are «qualified investors» within the meaning of Regulation D issued by the SEC. This eliminates the annoying need to provide all previous investors with the specified information that may need to be included in a securities offering to a group of buyers who are not just «accredited investors». Although almost all venture capital funding is limited to qualified investors, transfers may be made to non-accredited investors and, in order to minimise costs and delays in targeting the offer made to them, they should be excluded from the right of first refusal by the terms of the provision itself. This may be considered unfair to unaccredited investors, but the time and money savings justify it. When a venture capital firm has completed its due diligence and made the initial decision to invest in a holding company, the creation and adoption of a term sheet signals to venture capital and the holding company that «it`s all over except the screams.» The term sheet will be provided to the investors` legal counsel and the company`s legal counsel, and it is expected that the compliant documents will be ready promptly and the transaction will be completed in a timely manner and at reasonable attorneys` fees on both sides. In the case of a Series A preferred share investment, documentation becomes more important because it generally determines the basis and general form of documentation for subsequent investment rounds, as well as for the current round. Venture capital documentation is fairly standard, i.e. a share purchase agreement for the sale of a number of convertible preferred shares, preferred share provisions in the Company Charter, and one or more additional agreements containing classes of investor rights, such as. B rights of representation on the board of directors, the right of first refusal and rights of co-entry, registration rights and information rights. While this documentation may appear similar from agreement to agreement, the overall approach to creating these documents and the way many details are handled in the documents can vary greatly and will have a direct impact on the ability to reach a friendly and successful conclusion with minimal negotiations and reasonable fees in line with the expectations of the parties.
This article provides some general comments on the most desirable approach to creating venture capital documents, and then focuses on some of the details that can improve the usefulness of venture capital documentation for investors and the holding company. An IRA breaks down certain rights and privileges granted to certain investors. This may include information rights (e.g. B access to a company`s financial information that is important for lp updates), registration fees (which a company needs to register an investor`s shares with the SEC, giving the investor the right to resell his shares), pre-emptive rights (which allow the investor to accept or refuse to buy shares of the company before third parties can invest), and repurchase rights (which a company requires to buy back an investor`s shares if certain conditions are met). The provisions may be used to set up corresponding provisions for subsequent financing rounds. Shareholders` rights are also described in detail in this Agreement, in particular with regard to minority investors and the rights they hold. The best approach is to amend the Charter to incorporate the preferential stock provisions for each series into a single section of the Charter. This makes it possible to determine the relative rights, privileges and preferences of each series as well as those of the other series. While shareholder approval is required to amend the Charter, in most cases the required majority may be obtained by management and certain significant investors, and under Delaware law, the amendment may be approved by written consent signed by them, with notice to other shareholders. If a class or series has veto rights over the new series, it would have them regardless of the approach chosen, so this is not a crucial consideration. While the preferred share «blank cheque» appears to be an attractive alternative, the best approach to amending the Charter to create a single integrated section dealing with the rights, privileges and preferences of preferred shares may well be the best approach.
An agreement on investor rights may contain a wide range of provisions, such as.B. information rights. These rights describe how certain information about the Company may be shared with shareholders. The information may be of a financial nature and may only be shared with shareholders who have a certain threshold of shares, e.B 10% or more. At first glance, the approval in the company`s charter of the so-called «blank cheque» preferred shares, which allow the company`s board of directors to set the terms of one or more new series of preferred shares, seems attractive because no shareholder approval is required to approve the new series. The main problem with this approach is that with each new series, the terms of that series are included in the company`s charter alone, resulting in a series of designation documents instead of an integrated document that sets out rights and privileges, etc. .