BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
Information Rights VC investors are often entitled to regular, detailed financial and operational reports from the company. These rights can include quarterly and annual financial statements, budgets and audit reports. Right of First Offer/First Refusal/Pro Rata Such rights enable investors to participate in future funding rounds, to maintain or increase (super pro rata) their equity position. The company and the founders provide rep - resentations and warranties in the investment agreement, making a series of statements in favour of the investor regarding the start-up and its business, in order to provide the investor with “picture” of the start-up’s situation at the time of the investment. Typical representations and warranties provided in relation to the company include the following: 3.7 Contractual Protection Representations and Warranties • organisation and good standing – attesting that the company is organised, validly exist - ing and in good standing under the laws of its jurisdiction; • authorisation – attesting that all corporate actions required for the authorisation, execu - tion and delivery of the investment agree - ments have been taken; • use of proceeds – the company agrees to use the proceeds of the investment as stipulated in the agreement; • financial statements – attesting that the financial statements provided are true and complete and fairly represent the financial condition of the company; • compliance with laws – attesting that the company is in compliance with all applicable laws and regulations;
up’s development. More robust governance is secured when the company is structured as a corporation (rather than as a limited liability quota company). For this reason, VCs normally require start-ups to be transformed into corpo - rations prior to the conversion or equity invest - ment. Board of Directors Significant influence is generally obtained by the investor (or group of investors) having the right to appoint one or more members to occupy a minority of the seats on the board of directors. It is important to note that VC investments usu - ally involve minority stakeholding in the share capital, in such a way that the objective is not to take control of the company’s management. The majority of the seats on the board remain occupied by the founders. It is also common to see investors appointing people to act as “observers” of the board. Such investors gener - ally do not have a significant stake in appointing an effective member, but still wish to appoint a representative (without voting rights) to follow These provisions typically require that the inves - tor’s consent is needed for certain actions (veto rights), such as: • changes to the rights attached to the inves - tor’s preferred shares; • changes to the company’s charter or by-laws; • issuance of new shares or new classes of shares; and the board meetings. Protective Provisions • the company’s undertaking significant indebt - edness and entry into new business areas, or discontinuation of significant operations.
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