• Completion by the Investor of satisfactory financial and legal due diligence: It is critically important that a company in which an Investor plans to subscribe for shares be subject to some form of accounting and legal review, as this will enable him to know exactly what he is investing in. Financial due diligence would usually be carried out by the Investor’s financial advisor.
• Management employment contracts and emoluments to be agreed: An Investor may insist on the current management (which may include the shareholders) entering into service agreements with the company. This can act as a measure of protecting his investment as important figures in the company will be tied into a contract which may assist in the success of the company, while also limiting the amount that they are being paid. The investment may be dependent on such contracts being entered into.
• Keyman insurance: The Investor may also insist on keyman insurance policies being taken out on the lives of the company’s key executives, with such policies being made payable to the company. Again this will protect any investment as it acts to reduce the effect on the company should one of the main Promoters in the company die.
• Adoption of a business plan: A business plan sets out the main objectives of the company going forward and will seek to ensure that the objectives of both Promoters and Investors are aligned. A business plan is usually attached to the investment agreement and thereby becomes part of the agreement and may only be changed following the mutual consent of all parties.
• Intellectual property: The Investor will want to ensure that any and all intellectual property which has been or may be invented/created by company employees is owned by the company, and therefore should insist on all employees entering into appropriate assignment and proprietary agreements, as well as confidentiality and non-compete agreements should their employment in the company cease.

• Use of proceeds: This will provide that the company shall use the monies subscribed by the Investor solely for the purposes of the company’s business and as outlined in its business plan. There should also be a provision whereby changes to the business plan and its financial budgets and outgoings must be approved by the Investor.
• Board matters: The Investor should have the right to nominate at least one person to act as a director of the company depending on how much influence the Investor would like to have on the running of the company. If the Investor is seeking control of the decisions of the board then he may insist on a greater number of directors which he can nominate in order to give himself that control. The agreement should also set out the quorum needed to effect a board meeting and also the minimum number of such meetings which are required to be held each year.
• Conduct of business: As the company will also be party to the agreement it will enter into covenants regarding the conduct of the business. Such covenants would typically include that it will carry on the business in an effective and business-like manner in line with the business plan, and that any action undertaken by the company will be done in the ordinary course of business and in contemplation of the direct benefit of the company.
• Warranties: An Investor is usually afforded full joint and several warranties from the company and its existing shareholders. Warranties are effectively statements concerning the company, in particular concerning its share capital structure, business plan, liabilities, capacity, title to premises, assets, employees etc. The warranties tend to be the aspect of the agreement which gives rise to the most discussion between the parties and accordingly they should be regarded as being of great significance. The Investor will usually seek fairly extensive statements in relation to the target company, the substantive effect of which is a series of promises to the effect that the company is virtually perfect. The warranties will usually survive until the second anniversary of completion after which the Investors will no longer be able to claim for a breach.
• Investor consent: The investment agreement will usually provide for certain actions/matters which the company shall not undertake without the prior written consent of the Investor. A list of such matters is commonly scheduled to the agreement and can vary widely as to its contents.
• Investor information: Where an Investor decides not to take part in the running of the company or is not a member of the board of directors, a clause would usually be included whereby the company would have to provide the Investor with audited accounts annually within 90 days of year-end and monthly management accounts within 15 days of month-end, plus such other financial information as the Investors may request from time to time. Even if the Investor is very proactive in the running of the company he may still insist on the inclusion of this clause.
• Restrictive covenants: The investment agreement usually includes a clause which will restrict the current shareholders and Promoters from competing with the company. Such covenants will usually enter into force on completion of the investment and will continue for up to one year after the date on which the relevant shareholder ceases to be a shareholder of the company.
• Share transfers: There are a number of options open to the parties in relation to share transfers which can benefit their respective positions. For example there may be inserted a clause which will provide that the Promoters cannot transfer their shares without the prior written consent of the Investor. A clause such as this will mean that the Investor can ensure that the business would not suffer as he can effectively prevent a knowledgeable and possibly skilled Promoter from cashing in on his shares once the investment has been made. On the other hand the Promoters can insist on the benefit of what is referred to as the tag along provision. Where this provision is included and the Investor is selling his shares in the company, the Promoters shall be entitled to have their shares also purchased by the purchaser. This may arise where the company has become profitable and the Investor has decided that it is time that he reaps the rewards of his investment.
• Miscellaneous provisions: The agreement will also include many boilerplate provisions such as a confidentiality clause, an exclusivity clause, a governing law clause etc. These clauses would be seen as being standard in almost every type of legal document today.

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The Practising Accountants' Seminar

Alan is presenting on the Practising Accountants' Seminar details for which can be found below.