INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
dilution rights could be full-ratchet anti-dilution or broad-based weighted average anti-dilution. Although investors negotiate for a full-ratchet anti-dilution right as it is best from the investor’s perspective, generally the acceptable standard in India is to have a broad-based weighted aver - age anti-dilution. It is common to have pre-emption/subscrip - tion rights to the extent of the shareholding of an investor. If an investor does not exercise this right, the same can be offered to the other inves - tors. 3.6 Corporate Governance Typically, investors exercise their influence over management/affairs by having certain rights in the investee company. Some of these rights are as follows. • Board seat or observe seat including right to replace the nominee director or the observer. The director or observer has a right to attend a board meeting (but observer is not counted towards quorum and does not have a right to vote) and are entitled to examine the books, accounts and records of the company and shall have free access, at all reasonable times and with prior written notice, to properties and facilities of the company. The company is obligated to provide such information. • Right to have notice and the agenda of meet - ings. • Quorum right both in the board and share - holders’ meeting – If the investor nominee is not present, the meeting stands adjourned. If the quorum is still not met in the adjourned meeting, then the meeting proceeds without the investor nominee, but affirmative vote items are neither discussed nor voted upon at such meeting.
• Affirmative voting matter (AVM) right – AVM rights require the company to obtain prior written consent from the investor prior to taking decisions on critical matters – eg, alteration of charter documents, acquisition of other businesses and amendment of the annual business plan. • Information and inspection rights. 3.7 Contractual Protection Typically, investors seek representations and warranties, which can be broadly categorised as follows: • fundamental warranties (covering fundamen - tal issues like title to the shares/property, authority and capacity to enter into the agree - ments); • business warranties (covering all aspects relating to the operations of the business of the company); • tax warranties (covering aspects relating to taxation); and, sometimes, • special warranties (sought for certain specifi - cally identified indemnity items). These representations and warranties are taken as of the signing date of the transaction and are repeated as of the closing date of the transac - tion. Any change in the representations and war - ranties from the signing date to the closing date is disclosed through a disclosure letter, such that the investor has a right to walk away from the transaction if the representations and warran - ties differ from those represented on the signing date. The representations and warranties are well negotiated between the parties, and it is one of the critical areas of negotiation in a VC transac - tion. If there is any breach of representations and warranties prior to the closing of the transac -
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