UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
3.6 Corporate Governance The extent of investors’ control and influence over the management of the venture will vary, depending on the terms negotiated between the investors and founders. Typical market standard rights in relation to a company’s corporate gov - An investor or group of investors will be given the right to appoint at least one director to the company’s board. This right is usually commen - surate with having to maintain a specific share - holding percentage – eg, 10% of the company’s share capital. Observer Rights Sometimes an investor will not want to be exposed to the fiduciary obligations that come with being a director, instead preferring to appoint an observer to the board. An observer will not have voting rights, but can attend and speak at meetings, and relay information back to investors. The observer role is also often used to train up more junior members of the investor’s team. Consent Matters/Veto Rights Investors will cast votes in or be given the power to veto certain matters, such as: • issuing new shares or amending share classes and rights; • mergers and acquisitions; • significant changes to the business plan and budget; • changes to board composition; ernance include the following. Director Appointment Rights • entering into significant investments or debt; • exits that are not a qualifying sale, such as a secondary market transaction or winding down of the company; or • IPO and related party transactions.
preferred shares have their subscription monies returned in priority to (potentially) other preferred shareholders lower in the preference stack and, ultimately, before the holders of ordinary shares, such as the founders or employees. Voting Rights Investors will want to secure voting rights that provide them with influence and control in major decisions, such as the sale or winding down of the company. It is very common to attach anti-dilution provi - sions to preference shares and for the benefit of a preference class as a whole. They operate to compensate/rebalance the investor’s share - holding if the company raises a new round of finance at a lower valuation than the previous financing round. Such provisions will attach to a class of preferred shares and protect inves - tors in a new round of financing either through issuing bonus shares or altering the conversion ratio of preferred shares to ordinary shares. Anti- dilution protection usually functions by applying a mathematical formula to calculate the number of new shares the investors will receive, for no or minimal cost, to offset the dilutive effect of the issue of new shares at a lower valuation. A pre-emption right, also commonly known as “right of first refusal” , gives investors the oppor - tunity to subscribe to shares on a new issue or to other shareholders’ existing shares on a transfer before they are offered to third parties. Both anti-dilution provisions and pre-emption rights are prevalent in UK VC transactions, and feature in the BVCA shareholders’ agreement and articles of association standard templates.
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