Based in Cork, Munster, Ireland


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At FitzGerald Legal & Advisory LLP in Cork we offer a suite of services for business starts-ups including all legal issues and documentation for Venture Capital and Company Investments.

A typical investment in a company usually has four separate phases namely:
a) the preparatory phase;
b) the offer phase where agreement will be reached in principle on price and the major commercial terms;
c) the document phase where the terms agreed in the offer phase are turned into a legally binding document and;
d) the completion phase.

While it will be necessary to consult with your solicitor prior to commencing the transaction your solicitor will be primarily involved in the third and fourth phases of the investment.

Stage 1: The Preparatory Phase

It is a good rule of thumb to discuss matters with your solicitor prior to the preparatory phase as this essentially is dealt with at board level however it is and can be of great benefit in the long term to have a legal audit carried out at an early stage which will help exclude difficulties that might arise later on in the process. During the later stages of an investment legal due diligence will be carried out and it is better to prepare the grounds for this at the very beginning of the process.

Stage 2: The Offer Phase

In the offer phase the solicitor’s prime role is to prepare confidentiality / non-disclosure agreements prior to the exchange of any confidential information with the investor.

Additionally during the offer phase in the case of venture capital investment you will be presented with a term sheet or the in case of a private equity investment heads of agreement will be drawn up.  These are essentially one and the same and are non-legally binding heads of agreement which generally contain the financial details of the investment and a list of conditions to be satisfied before the investment is made including the obtaining of a satisfactory due diligence report.  The due diligence reports will be financial, legal and tax due diligence.

Stage 3: The Document Phase

While there are a number of legal documents at this stage perhaps the most important item to prepare is a checklist.  The checklist will essentially also comprise a time table for the completion of the transaction and each party must take responsibility for items on the checklist and time lines should be agreed in advance.  It is therefore essential to consult with all the professionals involved to ensure that the time lines are reasonable and achievable. It should also be updated regularly during the transaction.

The legal documentation generally comprises the following:

1. Subscription Agreement

This agreement generally sets out the legal terms of the investment such as the price,the class of share being issued and the rights attaching to them.It also contains representations and warranties regarding the company given for the benefit of the investor and it will also deal with non-compete covenants from the founders and management shareholders.

2. Shareholders’ Agreement

In some cases for example investment with Enterprise Ireland the subscription agreement will also include the shareholders’ agreement elements but in other cases the shareholders’ agreement is separate and distinct.  In many companies shareholder agreements already exist to legislate as between shareholders and of course investors will always require a shareholders agreement to deal with the following main items:

a) Veto rights which will arise in relation to certain business actions or the happening of certain events.

b) Information rights ie. the right to information from the invested company.

c) The right to board representation.  Board representation may or may not involve a board member with voting rights this depends on the type of investment.

d) The articles of association of the company.   The articles essentially deal with the internal management of the company and it will also contain details of the rights attaching to the various classes of shares in the capital of the company including those of the investor.  Certain of the elements in of the articles of association may also be contained in the shareholders’ agreement but they will primarily deal with the following:

• Voting Rights
• Dividend Rights
• Liquidation Preference Rights
• Anti-Dilution Rights
• Drag Along Rights
• Tag Along Rights

The shareholders agreement and the articles of association will generally contain pre-emption rights and effectively this gives the right of first refusal to existing shareholders if a shareholder wishes to sell their shares.

These are also important in the context of the investment as existing shareholders prior to the investment will have to waive their pre-emption rights in favour of the investor.  These are technical matters which will be dealt with during the course of the transaction and form part of the closing requirements for the subscription / share purchase agreement.

The other essential agreement of any share purchase / share subscription agreement is the matter of warranties and indemnities. These are critical from the point of view of the existing shareholders as these will effectively comprise personal warranties and indemnities usually limited to a percentage of the consideration (ie. investment / purchase price).  Sometimes these can be multiples of the consideration. It is not unusual that monies will be withheld for certain periods of the investment and these can be offset against warranty claims if they arise.

Essentially an investor company will rely on the answers given on financial taxation and legal due diligence and will also rely on the representation on matters such as IP, patents,R&D and licences.

In the event that the investor loses or considers that certain information was incorrect and a loss arises then they may issue proceedings on foot of this.  These are called warranty claims.  It is also, needless to say, not helpful to a working relationship with investors if these claims arise.

Indemnities usually arise in relation to payment of tax.  An indemnity is essentially a protection for the investor against losses arising where tax due by the company has not been paid or after audit further taxes are due by the company which should have been paid.  The indemnity deed will provide that this tax is to be paid by the shareholder / management personally as these are the persons furnishing the indemnity.

3. Disclosure Letter

This is a key document in the process.  It is essentially a letter setting out qualifications to the warranties furnished under the subscription agreement and therefore the warranties and disclosures must be considered together.

It takes the form of a letter from the warrantors to the investor and it is usually divided into two parts namely the general disclosures and the specific disclosures.

In addition a bundle of disclosure documentation will be attached to this letter setting out the documentation supporting the disclosures made.

This is prepared in duplicate and signed by each party.

The Disclosure letter is subject to negotiation and updating and amendment throughout the entire process and it is one of the final documents agreed prior to the investment concluding. It should therefore be drafted as early as possible and exchanged because it will be the subject to much negotiation at the final stages.

4. Other Miscellaneous Documents

Many transactions will also involve matters such as earn outs and executive employment agreements.  In addition company secretarial  documents required such as copy board minutes, CRO filings, tax clearance certificates  will be carried out by our dedicated Company Secretarial Department.

This is a brief overview of what can be a very complicated and drawn out transaction and one which involves negotiation up to the 11th hour.  In essence the nature of these transactions is that nothing is agreed until everything is agreed. However in the course of such an investment, if the future relations between the parties are considered to facilitate the next phase of development of the company it is essential that the entire transaction be conducted openly and in good faith.

Key points for investors.

  • Well managed companies.
  • Product fully developed.
  • Growing market (rapid growth).
  • Non capital intensive.
  • Asset backed.