PRIVATE AND CONFIDENTIAL
BVCA model document Subscription and Shareholder agreement –
consideration for covenants, warranties and undertakings given by Founders
Opinion
Background facts
1.
The British Venture Capital Association ("BVCA") Venture Committee (previously the
BVCA Technology Committee) and the BVCA Legal & Technical Committee, working
with leading venture capital investors and the legal community in the UK, designed in
2006 some standardised documents (the "Model Documents") for use in early stage
investments. These documents are kept updated by the BVCA Venture Committee.
2.
The Model Documents are marked with a disclaimer to the effect that those documents
are intended to serve as starting point only and should be tailored to meet a person's
specific legal and commercial requirements. None of the documents are to be
construed as legal advice for any particular facts or circumstances.
3.
The Model Documents include a model document subscription and shareholders
agreement (the "SSA"). The SSA is typically entered into by the company in which the
equity investments are being made (the "Company"), the investors and the existing
founders of the company (the "Founders").
4.
The SSA sets out a model form for the basis and terms on which investors (typically,
venture capital funds) (the "Investors") will subscribe for shares in the Company.
5.
All of the Founders will be employees, directors and/or shareholders of the Company.
The Founders are subject to a number of specific obligations in the SSA, including:
(a)
warranties relating to the Company and its business, given to the Investors on
a joint and several or several basis with the Company (clause 6 and schedule
5);
(b)
a waiver of claims against the Company, its officers, employees or agents in
respect of any information supplied by them in connection with, or which forms
the basis of, any of the warranties or any matter covered in the disclosure letter
(clause 6.9);
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6.
(c)
various business undertakings, given to the Investors (clause 12 and schedule
7);
(d)
agreement not to transfer interests in shares in the Company without the
consent of the "Investor Majority" (unless required to do so by the articles of
association) and agreement not to transfer shares unless the transferee signs
a deed of adherence to the SSA (clause 14); and
(e)
various non-compete and non-solicitation covenants (clause 15). Those
restrictive covenants are expressed to be given "[for] the purpose of assuring to
the Investors the value of the Business and the full benefit of the goodwill of the
business of the Company" and are given to the Investors and the Company.
The SSA also contains obligations on the Investors, in particular, the obligation to
subscribe for shares. There are also a number of obligations on the Company,
including the warranties (clause 6 and schedule 5) and business undertakings (clause
12 and schedule 7) referred to in paragraph 5 (above).
Model SSA executed as a Deed
7.
8.
The model form of SSA has to date been in the form of a deed. Two main reasons
have dictated the use of a deed:
(a)
to avoid concerns about whether or not consideration is provided by the
Founders for their obligations under the SSA, in particular the restrictive
covenants that they will be asked to give; and
(b)
because paragraph 16 of schedule 7 to the SSA contains a power of attorney
given by the Founders in relation to the signing of elections pursuant to section
431(1) of the Income Tax (Earnings and Pensions) Act 2003.
It is also considered that the use of a deed extends the limitation period from 6 years to
12 years. This is a subsidiary reason to those in 7 (a) and 7 (b) (above) as the BVCA
Venture Committee is of the opinion that this advantage is not, on its own, of sufficient
significance in the context of the SSA to necessitate the SSA being in the form of a
deed.
Use of a contract in lieu of a deed
9.
In order to avoid the inherent difficulties of execution formalities it has been suggested
that it would be preferable instead for the model form of SSA to be in the form of a
contract, largely to avoid the execution formalities necessary for deeds.
10.
The required power of attorney found in paragraph 16 of schedule 7 to the SSA could
instead be given by way of a separate deed, deliverable at completion.
SSA – current draft, clause 31 (Consideration)
11.
The SSA has been amended in draft form, following discussion by the BVCA Venture
Committee. The revised SSA as at 8 September 2014 contains a new but optional
clause 31 (Consideration). The intention of this new clause in the SSA is to facilitate
the use of the SSA as a contract rather than as a deed.
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12.
This clause provides as follows:
"The consideration under this agreement consists of the obligations of the
parties to each other, and the Founders [and the Existing Shareholders] agree
that payment by the Investors to each Founder [and each Existing
Shareholder] of £1.00 (receipt of which is hereby acknowledged), and the
investment by the Investors in the Company, alone and together amount to
good consideration in respect of the obligations of the Founders [and the
Existing Shareholders] under this agreement."
Established practice
13.
The use of a deed in a plethora of situations avoids concern as to whether
consideration has been provided for the promise that is to be enforced. Experience
shows that many advisors will insist on the use of a deed in transactions and will not
resile from this insistence.
Rules relating to consideration
14.
In summary, the decided cases establish the following:
(a)
Consideration must not be past;
(b)
Consideration need not be adequate;
(c)
Consideration must move from the promisee;
(d)
An existing public duty cannot be consideration;
(e)
An existing contractual duty cannot be consideration;
(f)
Part payment of a debt is not valid consideration for a promise to forego the
balance.
Questions
15.
Against the background that is described above, various questions arise.
16.
First, if the SSA was prepared in the form of, and to be executed as, a simple contract
instead of a deed, would there be sufficient consideration given for the restrictive
covenants, warranties and undertakings given by (and other obligations assumed by)
the Founders?
17.
I consider that there is a strong argument to answer the question that is posed in
paragraph 16 (above) in the affirmative. However, a strong argument is not definitive
and the contrary view cannot be said to be wholly unarguable.
18.
It is to be noted that all equity investment in a company comes at a “price”. In general
investors will not subscribe for shares without adequate protections or safeguards to
that investment that are invariably contained in documents such as shareholders’
agreements, subscription agreements and specially adopted articles of association.
The required protection for investors contained in such agreements is generally
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fundamental to the transaction and a condition precedent to the investment taking
place.
19.
The true nature of the SSA is that it is a bilateral executory contract containing mutual
promises and obligations. Consideration for the Founders' obligations, warranties and
undertakings that are contained in the SSA can be said to be provided by the entry into
the SSA by the Investors and the Company and their respective obligations and duties
under the SSA.
20.
Further, Founders give the restrictive covenants, undertakings and warranties in return
for the commitment from the Investors that they will subscribe for shares in the
Company on the terms set out in the SSA. There can be no other real reason for the
Founders giving such promises and entering into such obligations. Plainly, the
investment made by the investors will be viewed as something of value in law.
21.
However, set against the comments that are made above there remains the practical
issue that some advisors in corporate transactions insist upon the use of a deed. I
suggest that such insistence is not appropriate as it does not have sufficient regard for
the true nature of a subscription agreement as an enforceable bilateral executory
contract containing mutual promises and obligations.
Question 2
22.
If the answer to the question posed in paragraph 16 (above) is no, does Counsel
recommend that the consideration is expressed to be the payment of £1 and does that
payment need to be made at completion?
23.
Although I have indicated that there is a strong and compelling argument to answer the
question in paragraph 16 (above) in the affirmative, strong arguments are not
necessarily conclusive or dispositive.
24.
If the consideration is expressed in an agreement to be the payment of £1 there can be
no doubt that consideration has been paid. Whether the consideration is adequate is
not of concern to a court. Although the quantum is immaterial, the consideration should
pass and thus should be paid at completion.
Question 3
25.
Thirdly, and in the alternative, if the restrictive covenants, warranties and undertakings
given by the Founders are promises for which there is no consideration, would they be
enforceable if the Investors have relied on those promises as a whole in making their
equity investment in the Company?
26.
The analysis that the restrictive covenants, warranties and undertakings given by the
Founders are promises for which there is no consideration is not at all compelling for
the reasons that are set out above.
27.
Assuming that such analysis held good, it is very doubtful that Founders who sought to
escape liability for the restrictive covenants, warranties and undertakings given by
them in a transaction would succeed. Invariably, investors could demonstrate the
required degree of reliance on the restrictive covenants, warranties and undertakings
given by the Founders as a trigger to the making of an investment. It would be
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unattractive for a court to hold that the restrictive covenants, warranties and
undertakings given by the Founders were meaningless and unenforceable as promises
for which there is no consideration.
Question 4
28.
If Counsel is of the view that there is sufficient consideration for the restrictive
covenants, warranties and undertakings given by the Founders (such that they
constitute binding obligations on the Founders), does Counsel think that the argument
in favour is sufficiently clear so that it can be given as guidance for industry standard
documents?
29.
The answer to question 4 is in the affirmative. I consider that the argument that the
restrictive covenants, warranties and undertakings given by the Founders constitute
binding obligations on the Founders to be cogent, compelling and sufficiently clear to
stand as guidance for industry standard documents.
General advice only
30.
The content of this Opinion is not fact specific but sets out advice of a general nature
only. This Opinion cannot be relied upon in particular situations which will depend upon
their own facts.
Legal advice to be sought
31.
It will always be necessary to seek specific legal advice in any particular situation.
Disclaimer
32.
All Members should note that this Opinion is being made available with the
permission of Miss Roberts on the basis that members cannot and should not
rely upon it in any particular situation. Neither Miss Roberts, nor the BVCA nor
any members of the Legal and Technical Committee accept any liability to any
members or to any third parties in relation to the matters which are covered by
counsel's opinion.
Catherine Roberts
Erskine Chambers
London
8 September 2014
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PRIVATE AND CONFIDENTIAL
BVCA model document Subscription and Shareholder agreement –
consideration for covenants, warranties and undertakings given by Founders
Opinion
Taylor Wessing LLP
5 New Street Square
London EC4A 3TW
Tel: 020 7300 7000
UKMATTERS:31497432.1
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