SINGAPORE Law and Practice Contributed by: David He, Benjamin Teo, Kinnari Sahita and Binh Vong, Gunderson Dettmer Singapore LLP
the authority to issue new shares expires at the conclusion of the next annual general meeting (AGM) or on expiry of the period within which the next AGM is required to be held by law. 3.3 Investment Structure Standard Economic Rights in Early-Stage Financings A new class of preference shares is typically established in connection with a venture financ - ing. These preference shares feature downside protections, including: • anti-dilution rights (eg, the right of an investor to adjust their fully diluted stake in the com - pany and to protect their ownership percent - age in the event of a future “down round” ) and • liquidation preferences (the priority in which investors are paid in the event of a company’s liquidation, sale or dissolution). Standard terms of preference shares include “broad-based weighted average” anti-dilution rights protections which account for the size and severity of a future down round, and “1x, pari passu, non-participating liquidation prefer- ence” which provides newly issued shares pri - ority in distribution up to the dollar amount of their principal in the company, on equal seniority with other preference shares, and without “dou- ble dipping” or participating with the remaining proceeds distributable to ordinary shares. Contractual Rights Shareholders’ agreements generally include extensive negotiated contractual rights. These include: • board and observer rights, which detail enti - tlements to nominate directors or non-voting observers;
• information rights, which require the company to periodically provide certain financial report - ing and operating metrics to investors, as well as annual budgets and business plans; • pre-emption (or pro rata) rights, which provide some or all investors with the right to maintain their ownership percentage by investing in future rounds; • rights of first refusal (or first offer) and tag- along rights over the shares held by other shareholders (typically founders), which allow investors the first right to purchase shares being sold by founders or, alternatively, to participate in a sale transaction by founders to a third-party buyer; • drag-along rights, which enable a subset of shareholders to force a minority of sharehold - ers to participate in an exit; and • board and shareholder reserved matters, which set out actions that the company may not take without the approval of a certain group of investor directors and/or preference shareholders. It is not uncommon to confine certain rights to “major investors” holding a specified percentage of the share capital, and to require “burn-off” threshold with respect to board and observer rights, where an investor that has been diluted below a certain ownership percentage over time will lose such rights. Founder Transfer Restrictions, and Good and Bad Leaver Provisions In addition to subjecting founder shares to the aforementioned restrictions, investors typical - ly expect founders’ shares to be re-vested or subject to lock-ups. Founders may negotiate for “liquidity basket” , whereby a portion of their shares may be freely transferable without being subject to such transfer restrictions.
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