PORTUGAL Law and Practice Contributed by: Domingos Cruz, Joana Bugia and Constança Morão, CCA Law Firm
3.6 Corporate Governance The investors’ typical influence over the affairs of the company may vary depending on the stage of the company, the size of the round, the type of investment and the invested amount, but one way or another, VC investors usually exercise influence over the management, through all or some of the following rights: • by securing a seat on the board of the com - pany, with a non-executive board member, that usually (alone or together with other directors appointed by the other investors) exercises its influence over key strategic decisions and has the ability to veto certain actions that may have an impact on their investment; • by having the right to appoint an observer to attend board meetings; despite not hav - ing voting rights, observers will share their know-how, participate in discussions and be informed about the path the company is choosing; and • by creating qualified majorities that require the approval of a certain class of shares – and sometimes veto rights – for the approval of the general meeting resolutions that can impact the rights attached to their shares and the protective provisions of their investment. 3.7 Contractual Protection In the context of a financing round – and depend - ing on the stage of the company – usually the company and the founders (or solely the compa - ny) will be jointly and severally liable for a breach of the representations and warranties (R&Ws). The R&Ws can be categorised into two main types: the fundamental and the operational R&Ws.
but, in some scenarios, a full ratchet anti-dilution protection may also apply. As opposed to what happens in other jurisdic - tions, where the anti-dilution works as an adjust - ment to the conversion ratio of preferred shares into common shares, in Portugal it usually works as an automatic mechanism where, simultane - ously with the down round, the company makes a compensatory capital increase (through the conversion of reserves or at the nominal value). Liquidation Preference VC investors also require a liquidation preference which entitles them to receive, before the other shareholders, at least an amount of proceeds from the liquidity event equal to the amount of their investment. In the event that more than one VC investor is entitled to a liquidation preference at an equal level and the proceeds are not sufficient to completely fulfil the liquidation preferences of all such entitled VC investors, the proceeds are distributed on a pro rata basis with regard to the amount of the liquidation preference at the respective level. Participation Rights It is common for VC investors to request partici - pation rights in order to ensure that their stake in the company is not diluted in future invest - ment rounds or to prevent the occurrence of a change of control. The most common provisions in this scenario are the pre-emption rights provi - sion, which grants the investor rights over the issuance of new shares, the right of first refusal, which grants the investor rights over the sale of outstanding shares and, lastly and less often requested, the super pro-rata right, which main - ly entitles investors to invest in future funding rounds beyond their current percentage.
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