MALTA Law and Practice Contributed by: Dr Josef Cachia Fenech Gonzi and Cherise Abela Grech, GTG Legal
3.7 Contractual Protection On the conclusion of the financing deal, several contractual protections are typically agreed to between the parties, which may be split as fol - lows. • Representations and warranties: a standard set of provisions in such agreements would consist of numerous generic and specific warranties from both parties when enter - ing into such transaction. These warranties would cover potentially anything, from past liabilities and damages, as well as representa - tion regarding certain facts or disclosures. A breach of those warranties would entitle the other party to potential damages. Due to the specific nature of such warranties, it is also possible to bind the founding shareholders as jointly and severally liable alongside the company, so that the investor would have redress against individuals rather than the entity alone. This serves to prevent a situa - tion where the company pays damages to the investor from the investor’s own funds. It also allows the investor to take action against the shareholders directly in the event of corporate insolvency. In insolvency proceedings, the law of rankings may result in a situation that after preferential creditor claims are satisfied, the investor has no assets to resort to, hence joint and several liability protects the investor from such a possibility and gives the investor further forms of redress. • Restrictive covenants: non-compete and non- solicitation provisions are also very common in investor agreements to ensure that the investor does not start a competing busi - ness using the knowhow obtained from the start-up. Non-solicitation of employees and key staff are also fairly common to protect the company’s human resources. Likewise, strong intellectual property clauses are typi -
which unfairly prejudice their right. This is a very flexible and dynamic remedy with varying con - sequences. 3.6 Corporate Governance The extent of influence on decision making pow - er by the investors would depend on the agree - ment reached between the parties, on the num - ber of different investors, as well as the amount invested by the investors. This influence is typi - cally exercised through the rights outlined below. • The parties may agree on the investors having direct board representation, which may be either an executive director or a non-execu - tive director, depending on the extent of the influence agreed to between the parties. • Quorum requirements are also very common to ensure that valid meetings cannot be held if certain categories of shareholders are not sufficiently present. This ensures that even if the investors have voting rights, decisions are not taken without their knowledge or involve - ment. • It is also possible to appoint an observer, which allows an individual to attend certain meetings without being exposed to the fiduci - ary duties of a director. It is important to note that although, in practical terms, there is a dif - ference between executive and non-executive director, legally, they are subject to the same level of exposure or liability. • As mentioned at 3.5 Investor Safeguards , different voting rights, reserved matters and veto rights are also often used by investors to enforce their influence. The parties may agree to various other measures to ensure transparency. These would be agreed to in the shareholders’ agreement, addendums or supplements thereto.
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