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Business Investment – key issues to consider

We regularly advise businesses on securing investment and negotiate the associated contractual documentation. When an investor comes on board, the terms of investment should be made clear from the outset and a well drafted investment agreement can achieve this and provide a solid framework for the relationship between the parties. The subscription and shareholders’ agreement, commonly known as the ‘investment agreement’ is the key document (made between the investors, the company and its management/founders) which records the commercial terms of the agreement between the parties including details of the investment (usually cash), the shares subscribed for and promises from the company.

In addition to the investment agreement, the other key document is the Articles of Association (Articles) of the company receiving the investment, which will form part of the company’s constitution and regulate the internal management of the company. The Articles will usually also be reviewed and negotiated, as per the investor’s requirements, prior to an investment round. Investors also sometimes require a company’s directors and key employees to enter into new service agreements on completion of an investment round.

The Investment Agreement

In addition to the mechanics of how the investment is made, the following are the key issues we see most heavily negotiated, given the investor’s desire to protect his/her interests:

  • What level of control you will give up to an investor? Think about how much control you wish to retain in the business when selling a stake. The parameters of control will usually be set out in the investment agreement e.g. the extent to which an investor has an involvement in management of the company.
  • What issues will an investor need to approve? The investment agreement will usually contain a list of actions which cannot be carried out without investor consent, such as amending the company’s Articles, declaring dividends and issuing further shares. It is key that the interests of the parties are balanced, so that key decisions are reserved to the investor, yet the management are able to run the business on a day-to-day basis without undue intervention. The threshold for consent will depend on what is negotiated and how much money the investor invests in the company.
  • What rights will an investor have to appoint directors to the board? The investment agreement will usually set out that the investor has the right to appoint at least one director. You should consider whether such board representation will be cumbersome, particularly if the company plans to go through various different investment rounds.
  • What warranties will be given? Warranties are contractual statements (promises) contained in the investment agreement which act as assurances from the company and managers about the circumstances of the company and its business and afford the investor a level of protection if information provided is inaccurate, even though the investor may have undertaken due diligence on the company. Usually the company and founders will give the warranties and you should take advice on what limitations should apply e.g. a cap on the amount of warranty claims.
  • What restrictions are you prepared to enter into? The investor will usually insist on there being restrictive covenants which prevent the founders from setting up in competition with the company when their involvement in the business ceases, for example restricting them from competing with the business of the company and from dealing with its customers or employees. It is essential to take advice on which restrictions would be considered reasonable by a court and be enforceable.
  • What management information can the investor receive? The company will usually be asked to make available regular information updates to the investor in a timely manner. The company will need to consider what access to key information the investor should have. This can be burdensome and the scope of this obligation should be considered carefully.

Other matters we commonly see contained in an investment agreement include provisions relating to the parties’ intentions to work towards an exit (e.g. a sale of the company or listing on a recognised stock exchange), dividend policies and confidentiality.

If you require advice on this matter or any corporate or commercial law issues please contact Sej Lamba on 020 7288 5756 or by email at SehajLamba@boltburdon.co.uk.

You can also contact one of our other solicitors in the Corporate and Commercial team here.

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