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Preparation of Investment Documentation – Laceys guide on what to include.

1st June 2018 by Victoria Boynes-Butler

Categories: Business News
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Legal documents associated with investing in private companies can be complicated. It is imperative that you show your solicitor every document so they can explain complex concepts to ensure you understand all issues and minimise risks where possible, even if they are not an immediate concern to you at the time of the investment. Laceys regularly draft and advise upon investment documentation and highlight below some of the things you should be looking out for.

Pre-emption rights: this is a right of first refusal on the issue of new shares by the company and is necessary to prevent dilution of your shareholding without your prior consent. You may also want a right of pre-emption on the transfer of shares to ensure that other shareholders cannot simply transfer to an unknown third party without offering those shares to you first.

Drag and Tag: it is unusual to find a buyer for part of a shareholding and therefore if you are a minority shareholder, you will want the option to be able to “piggyback” onto a deal procured for majority shareholders and equally as a majority shareholder you may want to be able to drag minority shareholders so that a deal for the entire shareholding is not scuppered by a shareholder with a minor interest.

Roles of founders: clearly define the role of the founders with lack of fulfilment being punished by way of a compulsory transfer of the breaching shareholder’s shares. This will ensure that the management team you bought into is delivering as promised.

Restrictions: it will be important to protect your business interests from being replicated by the founders/management team elsewhere if the agreement is no longer lucrative for them. Some founders may be of the opinion that they can market their idea, or use their contacts elsewhere so it is important to clearly restrict their action during and after they cease to be a shareholder. Recently the courts have been more willing to enforce wider restrictions in shareholders’ agreements than employment contracts creating added protection for investors, although this still requires careful judgement.

Minority shareholder protection: under company law, shareholder decisions can be passed by a majority or by at least 75% of shareholders, therefore minority shareholders may be overlooked. For example as a minority shareholder, you will have no right to management information, so a right to see budgets, management accounts etc. should be included as a contractual right. This can also be a right to veto any specific or major decisions.

Warranties: it is important to get at the very least basic warranties e.g. assurances that the business plan and budget are accurate. The agreement should also deal with enforcement of a claim under the warranties, for example, is each warrantor liable for the total amount of the claim.

If you would like to discuss an investment agreement, please contact Victoria Boynes-Butler of the Company Commercial team at Laceys, sponsorship partners of Dorset Business Angels, at v.boynes-butler@laceyssolicitors.co.uk or on 01202 205027.

Victoria Boynes-Butler

Solicitor — Corporate and Commercial

Direct dial: 01202 205027
Switchboard: 01202 557256

Email

  • “First Class Service. ....Sam and Victoria were an absolute pleasure to work with whilst expertly guiding us through the pitfalls of the merger.”

    Caroline Kelleway, Burns Property Management and Lettings Limited

  • “We would like to thank Victoria and the rest of the team at Laceys for helping us in a very professional, efficient and courteous manner complete the acquisition of the Cottage Lodge Hotel in Brockenhurst.”

    Maurizio Redaeilli, Cottage Lodge Hotel Limited

  • “I was pleased to work with Sam and Victoria who managed to simplify this matter for us, and explain the intricacies of the transaction at each stage and advise us accordingly. They provided great flexibility in working with us both and guiding us through this whole transaction. Many thanks.”

    Tim Townsend, Hamilton Townsend

  • “Only fools make big, long term decisions without gaining sound advice and I am so glad to have been able to share my big burden with such understanding and competent professionals as Victoria. Although I had some end objectives I could never have worked out the best way there without their help.”

    Piers Chichester

  • “Very good service, plenty of off-road parking, made our life easy and helped us sort out a difficult situation and explained it to us in layman's terms.”

    Richard Wayles, Meridian Electrical Contracting Limited

  • “An extremely efficient firm of Solicitors, who have dealt with my family legal needs as required for at least 20 years, even though I have moved to Australia after living in Dorset all my life.”

    Judith Brown

Victoria is a member of our Corporate and Commercial team having recently relocated back to Bournemouth from London. Victoria has advised businesses, charities and individuals across a range of sectors, specialising in corporate acquisitions and associated finance and commercial contracts.

Victoria adopts a pro-active, straight-forward approach in helping clients achieve their long-term business aims.

Outside of work Victoria makes the most of living on the South Coast with long walks in the New Forest and paddle boarding in Sandbanks.

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