MK @ Legal Biz Leaf General Investment Agreements
When a venture company seeking to go public raises funds from investors, it is necessary to conclude various agreements before issuing class shares.
Unlike small- and medium-sized companies run by individuals or families, venture companies usually receive investments from investors who have a variety of purposes to invest the companies. For example, a VC usually makes an investment with a fixed term and with the objective of providing a financial return to its constituents. On the other hand, a CVC invests in companies within the same industrial field with the objective of increasing business synergies. There are also some individual investors (Angels) whose objective is simply to support venture companies. To invite these investors having different aiming goals as shareholders, it is necessary to show them a unified overall business plans and capital policies of the company and to have a common understanding of the content of the contract to be concluded with each investor. Otherwise, each investor may interfere with the business of the company for its own objectives.
The following are three main types of investment agreements to be concluded in Japanese Venture Companies.
(1) Share Purchase Agreement: An agreement that mainly stipulates the terms and conditions of the investment at the time of the issuance of shares.
(2) Shareholders Agreement: An agreement that mainly defines the rights and obligations of the main investors, the issuing company, and the founding shareholders after the investment is made.
(3) Residual Distribution Agreement: An agreement that mainly stipulates matters related to an Exit Plan.
Share Purchase Agreement
Contracting Parties: Investor, issuing company, and founding shareholders
* In most Japanese companies, the founding shareholder is elected as executive directors and have majorities of voting ration. So, they have executive authorities over how the investment funds are to be managed. Therefore, in many cases, the founding shareholders are included as parties to each agreement listed above. In other words, it is not necessary to have the founding shareholders, who have less effective control, participate as parties to the agreement.
A Share Purchase Agreement is a contract that mainly stipulates the terms and conditions of investment execution and other matters up to the time the investor makes the investment.
Contracts regarding the rights of major shareholders and obligations of the company after the investment are often concluded separately in a shareholders’ agreement since it is desirable to conclude a contract with uniform content with existing shareholders or investors who will become shareholders in the future.
(i.e., If such agreements are to be concluded with each investor, the company may have different obligations to each investor, which might increase the burden on the company.)
As a preliminary step to the actual conclusion of each agreement, a “term sheet” is prepared, which lists the simplified investment terms and conditions, etc.
The following is a sample of the term sheet which summaries the contents of the Share Purchase Agreement.
(1) Outline of financing
|
1 |
Type of shares |
e.g. Class B preferred shares The type of shares to be allotted to investors are specified. |
|
2 |
Total number of shares authorized to be issued and total number of shares issued. |
e.g.) The total number of authorized shares, the total number of issued (class) shares, and the details of potential shares, etc. (share options, etc. and shares to be delivered in exchanged for the share options) prior to the issuance of shares are specified. |
|
3 |
Number of shares |
e.g. 1,000 shares Number of shares to be issued are specified. If the total number of shares to be underwritten by more than one investor at the same time, a breakdown of the number of shares to be underwritten by each investor are also included. |
|
4 |
Issuing price |
e.g., Issuing prices (per share) are specified. |
|
5 |
Total Amount |
— billion yen |
|
6 |
Terms of Payment |
e.g., In some cases, it may not be possible to purchase equipment or establish a planned research and development system unless a certain amount of funds are raised through investment by multiple investors. In such cases, the minimum amount of funds to be raised may be set as described above, and if it is not reached, the plan to issue the shares may be terminated. On the other hand, in some cases, the maximum amount to be raised (upper limit) may be set in order to control the equity ratio. In addition, an appointment of an important person as a director or a reorganization within the group company may be a condition. |
|
7 |
Capital
|
e.g., |
|
8 |
Payment date |
e.g., XX, XX, 20XX (scheduled) In the event that payment is not made by the payment date, the investor will lose the right to become a shareholder. |
|
9 |
Additional Issue |
e.g., Based on the same terms and conditions as the current issue, the following additional issues may be permitted The maximum number of additional shares to be issued: — shares. In the event that an investor who planned to invest at the same time delays the investment period, the above conditions may be stipulated (permitted) in advance to ensure the equality of subscription conditions. |
|
10 |
Details of class shares |
Please refer to previous articles for details. |
(2) Use of funds
|
Use of funds |
e.g.) The issuing company shall use the investment money for recruitment of human resources and research and development deemed reasonably necessary for business development. This provision is stipulated to prevent the investment funds from being used for purposes unrelated to the business. |
(3) Representations and Warranties
Since it is not convenient for investors to conduct due diligence on investee companies for each time they invest, investors often demand companies to make the following representations and warranties in the agreement.
The following is just an example, and the content of the guarantees should be determined in accordance with the growth stage of the investee company. It is not considered appropriate to make the feasibility of the guarantees difficult by requiring too strict guarantees.
|
Guarantee by |
– The issuing company shall have a power and capacity to enter into the Share Purchase Agreement and issue the shares. – The issuing company shall have taken appropriate resolution at appropriate decision-making authorities regarding the issuance. – The issuing company shall not be in violation of any laws or regulations or be subject to any lawsuits. – The issuing company shall obtain all necessary permits, licenses, and intellectual property rights. – The balance sheet and profit and loss statement of issuing company shall be correct. – The issuing company shall not have any relationships with antisocial forces. – The issuing company shall submit the required materials. |
|
Guarantee by |
– The founding shareholders shall have a power and capacity to enter into the Share Purchase Agreement and issue the shares. – The founding shareholders shall not be in violation of any laws or regulations or be subject to any lawsuits. – The founding shareholders shall not have any relationships with antisocial forces. |
|
Guarantee by investors
|
– The investors shall have a power and capacity to enter into the Share Purchase Agreement and issue the shares. – The investors shall not have any relationships with antisocial forces. |
In addition to the above, a Share Purchase Agreement also stipulates arrangements regarding preferential subscription rights to maintain the investor’s equity ratio (usually excluding the issuance of SOs equivalent to a percentage), penalties for breach of contract (demand for purchase of shares, demand for compensation for damages), conditions for termination of contract, and other provisions.
Please note that if it is an international agreement, it is necessary to include provisions such as agreed jurisdictional courts or conflict of laws exclusion rules, etc.
MK @ 11/17/2022
