UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
Consent matters are usually split into “value leakage” -type vetoes, which affect the investor’s economics, as compared to more operational vetoes, which become less relevant over time as the management team gains experience. Information Rights The company will provide investors with spe - cific information on a regular basis relating to the performance of the business, strategic growth plans and financial reporting to assist in keeping the investor informed on their investment (par - ticularly if they do not have a board seat) and to satisfy their fund reporting obligations. 3.7 Contractual Protection The subscription agreement will contain a schedule of warranties, which are contractual statements of fact made by the company (and sometimes its founders) as to the condition of its business. The warranties ensure confidence in the investment and constitute a right to bring a claim for damages should something prove to be untrue and the investor can demonstrate loss. Warranties typically relate to the ownership of shares, assets and IP, employment, the financial health of the company, any legal issues, such as involvement in disputes, and the accuracy of information provided. Sector-specific warranties are also important, depending on the industry in which the company operates. The normal recourse in the case of a breach of a warranty is to make a contractual claim against the company itself – which essentially means the investor would be looking to recover monies from their own investment. As such, disclosure becomes very important so that the investor is entering into the transaction with their “eyes open” . The founders may give warranties as well, but this is rare; if they do, it is typical for their liability to be capped at a multiple of their
salary, which is more common at seed-stage investments. Usually, the subscription agree - ment will contain a provision prohibiting an investor from bringing a claim without the con - sent of the majority or all of the shareholders. To mitigate the risk of breach and conflicts that arise in bringing a claim, thorough due diligence and detailed disclosure at the time of the invest - ment are crucial. In the US, it is standard for the warranties to be representations as well. This is not the position in UK venture capital deals because it gives rise to a misrepresentation claim where the remedy is recision or a claim in tort, rather than contractual damages, and can therefore have unintended consequences due to the different remedies. Restrictive covenants and undertakings are a common feature of deals found in the share - holders’ agreement. Restrictive covenants limit the activities of founders and key employees, both during and after their employment with the company. For example, covenants will restrict founders from being involved with any compet - ing business or acting in a way that harms the venture. Restrictive covenants must be time limited and jurisdictionally concise in order to ensure enforceability. Undertakings are positive obligations put on the company and founders to perform certain actions or achieve milestones. They can be specific, such as rectifying an issue discovered in due diligence, or general, such as taking all action necessary to protect the company’s IP. Breaches of covenants and undertakings will generally be remedied by specific performance or contractual damages.
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