Early-stage investments
Updates to the BVCA model documents for early-stage investments
Context
Earlier this year, the British Private Equity & Venture Capital Association (the BVCA) published updated versions of its model documents for early-stage venture capital investments, replacing the editions from February 2023 (see our client update on this here).
The updated suite of documents include:
- a Shareholders’ Agreement;
- a Subscription Agreement;
- an Articles of Association; and
- a Summary of Terms (which is a new document provided by the BVCA for negotiations at the outset of transactions),
and are designed for Series A funding rounds so may not be suitable for earlier Seed or later Series investments.
The revised model documents are available on the BVCA website here. You will need to register for a free BVCA account to view and download these documents.
We outline below the key changes made to the previous set of model documents.
Subscription Agreement
Including changes to Completion Mechanics, Warranties, Confirmations and Regulatory Actions
Shareholders' Agreement
Including changes relating to Restricted Information Disclosure, Director Indemnification, Protections for VC Investors, Variation of Share Rights and Company Undertakings
Articles of Association
Including changes to "Bad Leaver" provisions, Anti-dilution, Liquidation Preference, Sanctions and Variation of Share Rights
Subscription Agreement
Completion Mechanics
A streamlined alternative completion mechanic has been added to the Subscription Agreement for use in circumstances where the investee company anticipates receipt of all investor funds prior to completion. While this carries the benefit of providing simplified drafting, these mechanics offer fewer protections for the investee company as compared to the default completion provisions. For example, the longform completion process grants the board discretion to effect a variation to the terms of the Subscription Agreement to remove all references to an investor in the event such investor fails to pay its subscription monies by the defined longstop date. This is omitted in the simplified alternative.
Warranties
In recognition of the rapid advance of artificial intelligence (AI), the Subscription Agreement has been updated to include comprehensive company warranties in relation to AI and its uses. Significant updates have been made to the IP, business systems and data protection warranties as well as new insolvency warranties being included.
Confirmations
The Subscription Agreement now contains a confirmation from investors regarding the exemption on financial promotion on which they rely for the purposes of their investment.
Regulatory Actions
An optional further assurance style provision has been added to the Subscription Agreement in order to bind the investee company to provide such assistance, to deliver such documents, and perform such acts as may be reasonably required by investors or regulators to satisfy potential investigations or actions by regulatory authorities (including any call-in under the National Security and Investment Act 2021).
Shareholders' Agreement
Restricted Information Disclosure
The revised Shareholders’ Agreement includes provisions granting the board of the investee company the discretion to restrict an investor-appointed director from disclosing information obtained in their capacity as a director to the appointing investor. This discretion may be exercised in circumstances where such disclosure would: (i) give rise to a conflict of interest between the investor and the company; (ii) risk waiving or prejudicing attorney client privilege; (iii) jeopardise the patentability or confidentiality of highly sensitive scientific data; (iv) be prohibited by applicable law; or (v) result in a breach of a group company’s confidentiality obligations to a third party and such disclosure would be detrimental to the company’s interest.
Director Indemnification
Optional language has been added to the Shareholders’ Agreement providing an undertaking from the investee company to either enter into an agreement to indemnify an investor appointed director or to directly indemnify investor appointed directors.
"The inclusion of this protection for investor directors reflects the approach typically requested by US investors."
Kingsley Boateng (Associate, Northridge)
Protections for VC Investors
The Subscription Agreement now includes an acknowledgement that named investors may invest in companies competing with the investee company subject to a restriction on the disclosure of confidential information. There is also further drafting recognising that such investors shall not be required to present investment opportunities they may become aware of to the investee company. These updates reflect the growth of sector-specific investors who may hold multiple investments in the same or similar segments of the market.
Variation of Share Rights
The updates to the Shareholders’ Agreement and the Articles of Association introduce provisions that pre-approve certain changes to share rights and expressly confirm that such changes will not constitute a variation of class rights requiring separate class consents. These amendments appear to have been prompted by the Court of Appeal’s decision in DNANudge Ltd v Ventura Capital GP Ltd [2023] EWCA Civ 1142, in which the court held that an automatic conversion of preferred shares to ordinary shares (under a mechanism derived from the then-current BVCA model articles) was void.
Company Undertakings
The schedule of company undertakings has been expanded to include new obligations requiring the investee company to implement and maintain appropriate procedures, practices, and policies addressing anti-money laundering, the prevention of tax evasion, compliance with applicable sanctions laws, and the integrity and reliability of financial reporting.
Articles of Association
“Bad Leaver”
The BVCA has removed the optional “resignation” limb from the definition of a “Bad Leaver.” As a result, resignation will no longer automatically constitute a Bad Leaver event under the updated Articles. The BVCA noted that its working group had rarely seen resignation treated as a Bad Leaver trigger in practice. However, since resignation continues to be included as a Bad Leaver event in some transactions, parties should consider and address this point explicitly during early-stage negotiations (and enshrine in the Summary of Terms, where possible).
Anti-dilution
Additional language has been introduced to clarify the operation of anti-dilution protections in scenarios where Series A shares are issued with differing starting prices – for example, where certain Series A shares are issued upon conversion of convertible securities. The amendments confirm that the investor majority may waive the application of anti-dilution protection, in whole or in part. This flexibility is particularly useful in funding rounds involving the conversion of convertible instruments at a discount, such that the shares issued on conversion are deemed issued at the non-discounted price for the purposes of the anti-dilution protection.
Liquidation Preference
Amendments have been made to the drafting of the liquidation waterfall to more accurately reflect its intended operation in practice. In addition, the provisions now expressly permit the board of the investee company, where acting reasonably and in good faith, and with the consent of the investor majority, to determine the applicable exchange rate for any amounts denominated in different currencies.
Sanctions
In alignment with the new company undertakings relating to compliance with sanctions law under the Shareholders’ Agreement, the Articles of Association have been updated to prohibit the allotment or issuance of new securities to any sanctioned person. The board has also been granted the authority to request information from shareholders to confirm that they are not sanctioned persons. Where, having obtained advice of legal counsel, the board determines that a shareholder is a sanctioned person, the updated Articles include provisions requiring the transfer of that shareholder’s shares.
Variation of Share Rights
In conjunction with related amendments to the Shareholders’ Agreement, a new provision has been introduced into the Articles to clarify that the exercise of any right or discretion expressly provided for in the Articles shall not constitute a variation or abrogation of the rights attaching to any class of shares. Accordingly, the drafting provides that such exercise will not require the consent of the holders of those shares or that class.