INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
the other advantage of preference in company liquidations. Some of the common features or rights attached to CCPS are as follows: • preference in payment of dividend; • conversion right upon the expiry of a period or upon the happening of an event – eg, anti- dilution or corporate reorganisation; • liquidation preference – both in winding-up and secondary sale event like IPO, trade sale; • anti-dilution protection; and • voting right on “as if converted” basis. 3.4 Documentation As far as documentation for a VC deal is con - cerned, generally the following documents are common: • a term sheet, which is generally non-bind - ing except for a few clauses like cost and expenses, exclusivity and confidentiality; • a share subscription agreement for primary issuance of shares; • a share sale and purchase agreement for a secondary transaction; • a shareholders’ agreement, which governs the rights and obligations of the parties and the provisions regarding management and governance of the investee company; and • sometimes, specific letter agreements are also executed among several parties to record some understanding between such parties. 3.5 Investor Safeguards Downside Scenario – Liquidation Preference To protect investors in “downside scenario” such as the winding-up of a company, liquidation preference provisions are provided. Indian insol - vency law provides for a waterfall mechanism
(ie, the order in which the liquidation proceeds will be distributed). As mentioned above, CCPS, being preference shares, are paid in priority to the common stock. Indian insolvency law pro - vides that any contractually agreed priority for the same classes of shares will not be enforcea - ble in law. For example, holders of equity shares cannot have priority over each other; however, preference shares can have priority over equity shares. Besides winding-up, where the liquidation pref - erence is statutorily governed, liquidation prefer - ence can be contractually agreed in events such as exits by investors upon a strategic sale or change of control of a company, while enforc - ing drag-along rights and any other form when the existing investors/shareholders sell their shares through a secondary sale. In such sale, the investor is provided with a liquidation pref - erence, vis-à-vis the founders of the company. As amongst investors, the distribution is made in proportion to their shareholding unless it is agreed that earlier series/round investors will be paid in priority over the investors of the later series/round. Liquidation preference is mostly participating in nature, which means that once the investors have been paid their principal amount (ie, origi - nal investment), they will then participate pro rata in the amount remaining for distribution. Anti-Dilution and Pre-Emption/Subscription Rights These are common provisions in VC transactions in India. Both anti-dilution and pre-emption/sub - scription rights are provided in the shareholders’ agreement. Anti-dilution rights are provided for a certain number of years, such that if a down- round happens during that period, the investor is protected through anti-dilution protection. Anti-
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