PE Term Sheet Indian Scenario

Drafting & Management of Commercial Agreements
in Private Equity & Venture Capital Deals License & Technology Transfer Agreements -Jeet R.Shah M.Com , CFP CM
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Part - 1 Agreements in Private Equity & Venture Capital Investment Deals
Part - 2 License & Technology Transfer Agreements
Agreements in Private Equity & Venture Capital Investment deals
Object
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From where, through what vehicle, at what time, what amount, in which company, through what instruments, investment is made in most tax efficient manner, so that entry and exit are very easy & flexible Ideally win-win situation for PE / VC & Entrepreneur both
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Drafting & Management of Commercial Agreements Agreements in Private Equity & Venture Capital Investment deals .. Cont.
1. Term Sheet - abridged form of terms & conditions on which PE may invest in the company 2. Share Purchase Agreement - (also referred as Shareholders / Investment Agreement etc.) It provides for detailed arrangement between PE & company.
IMPORTANT CLAUSES & ISSUES Investment Instruments - Preference / Equity Shares Board Representation Voting Rights ESOPS Intellectual Property Rights
Restrictive Agreement with Key Persons Section 27 Contract Act 1872 Non Disclosure / Confidentiality Non Compete Anti Dilution - Full Ratchet Drag Along / Tag Along First Right of Refusal Financial Covenants for Control
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Representations & Warranties Material Adverse effect clause Information Rights Exits Liquidation preferences Dispute Resolution Boilerplate Clauses / Standard clauses
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1. Investment Instruments - Preference / Equity Shares

[section 80, 80A, 85]
a. Preference Shares - preferential right to fixed amount or rate - preferential right on repayment on winding up - redeemable / irredeemable - convertible / non-convertible - cumulative / non-cumulative b. Equity Shares
2. Voting Rights
[section 87]
a. Equity Shareholder - has right to vote on every resolution placed before the company b. Preference Shareholder - has right to vote only on resolutions which directly affect their rights - cumulative / non cumulative can vote on all resolutions if dividend are in arrear for not less then two years
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3. Dividend Rights PE would generally ask for preference shares with cumulative dividend rights with usually fixed at a % of the subscription price 4. Board Representation PE / VC may require its representation on Board for monitoring and control. Chairman ? Casting Vote ? Deadlock situation ? Further financing ? Control ?
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5.
ESOPS Employee Stock Option Plans issue of ESOPS to employees / directors will result in dilution of shareholding of PE / VC Accordingly it may ask for fully diluted valuation
6. Intellectual Property Rights Should be duly registered Should be included in the valuation of the company Rights after Exit of PE, clearly defined
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7. Non Disclosure / Confidentiality Should not allow fishing 8. Non Compete PE / VC may require key person or techno persons of the company to enter non-compete Agreement with the Company. Section 27 Contract Act 1872 Any agreement in restraint of trade and profession is void Partial restriction allowed
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9.
Anti Dilution - Full Ratchet - To protect the value of PE / VC stake if new shares are issued at lower price - New shares issued to PE / VC at no or nominal cost to offset the dilative effect of issue of cheaper shares - Issue of additional shares to PE to maintain its ownership at same level - Several variations of formula to provide different degree of protection
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10. Drag Along This provision might create obligation on all shareholders of the company to sell their shares to a potential purchaser, if certain % of the shareholders vote to sell to the purchaser When PE decides to sell its stake to third party, the entrepreneur is dragged along / forced to sell his stake. The clause may not be stated upfront, but can be cleverly worded in the document
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11. Pre-emptive rights If one shareholder wishes to dispose of shares that are subject to a pre-emptive right, it must first offer to existing shareholders before selling to third party 12. Material Adverse effect clause PE may walk out if market for the entrepreneur turns unfavorable. Material adverse effect must be clearly worded
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13. Financial Covenants FC FC may be part of the agreement, FC are the promises by the company to adhere to certain limits. For example, not to allow certain balance sheet items or ratios to fall below or go over an agreed upon limit. FC protects PE, by acting as an early warning system before something goes wrong. This allows PE to step in before default occurs and take corrective measures
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Examples of Financial Covenants Debt Equity Ratio = Debt / Equity Net Income Interest Cover = EBITDA / Finance charges Leverage = Total Net Debt on last day of relevant period / EBITDA for the relevant period Debt Service Cover Ratio (DSCR) = Net revenue during relevant period / Sum of financing costs due during same relevant period
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14. Representations & Warranties R&W To be provided by the Key founders, management and the company. It generally covers Legal existence of the company Financial statements Assets Ownership ex. IPRs Liabilities Material contracts Contacts with key personnel's
Company to reimburse the PE for diminution in the share value attributable to the R&W being inaccurate
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15.
Exits IPO M&A Strategic sale
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Dispute Resolution Litigation / Arbitration India or abroad Governing laws & procedure Outside India may be costly and inconvenient to entrepreneur
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17.
Boilerplate Clauses Arbitration Amendment & Modification Assignment Best and reasonable endeavors Entire Agreement Force Majeure Governing Laws & language Interpretation No Agency, partnership
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Boilerplate Clauses .. Cont. Interest Payment Jurisdiction of the courts Service of notices Specific performance Severability Taxes, Levies, Costs, stamp duty Time to be of the essence Waiver
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Some specimen Boilerplate Clauses

FORCE MAJEURE Any failure or delay of a Party to perform any obligation under this Agreement solely by reason of acts of God, government acts, riots, wars, strikes, lockouts, accidents in transportation or other causes beyond its control (but which for certainty shall not include a Partys failure to raise financing) (a Force Majeure Event) shall not be deemed to be a breach of this Agreement; provided, however, that the Party so prevented from complying shall continue to take all actions within its power to comply as fully as possible within the provisions of this Agreement. Performance of this Agreement shall resume as soon as practicable after such Force Majeure Event has come to an end or has ceased to exist. Notice to be Given Except where the nature of the Force Majeure Event shall prevent it from doing so, the Party prevented from performing its obligations due to such Force Majeure Event (Affected Party) shall notify the other Party in writing within seven (7) days or earlier, if reasonable, after the occurrence of such Force Majeure Event of its occurrence and estimated duration. The Affected Party shall in every instance, to the extent it is capable of doing so, use its best efforts to remove or remedy the cause of such Force Majeure Event with all reasonable dispatch Cessation Upon cessation of a Force Majeure Event, the Affected Party shall give prompt notice in writing to the other Party of such cessation. 22
Some specimen Boilerplate Clauses

WAIVER If at any time any Party waives or fails to enforce any right under the provisions of this Agreement, such waiver or failure shall not be construed as a continuing waiver or failure to enforce this Agreement against the other Party or other provisions of this Agreement. None of the terms of this Agreement shall be held to have been waived or altered unless such waiver or alteration is in writing and signed by the Parties. SEVERABILITY If any provision of the Agreement is found by any court, tribunal or administrative body of competent jurisdiction to be wholly or partly illegal, invalid, void, voidable, unenforceable or unreasonable it will, to the extent of such illegality, invalidity, voidness, voidability unenforceability or unreasonableness, be deemed severable and the remaining provisions of the Agreement and the remainder of such provision will continue in full force and effect.
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License & Technology Transfer Agreements
IMPORTANT CLAUSES & ISSUES Payment for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits: The Lump sum payments not exceeding USD 2 million; Royalty payable being limited to 5% for domestic sales and 8% for exports, without any restriction on the duration of the royalty payments. The royalty limits are net of taxes and are calculated according to standard conditions.
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IMPORTANT CLAUSES & ISSUES.....Cont. Define Technology and List of IPRs Grant of License Rights & Obligations of Licensee and Licensor Exclusive / Non-exclusive Transferability Term
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IMPORTANT CLAUSES & ISSUES .. Cont. Revocability Territory Sub-licensing Advertising & Promotion Audit of accounts from outside agency Royalty Payment and Calculation
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THANK YOU
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PE Term Sheet Indian Scenario

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PE Term Sheet Indian Scenario

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Drafting & Management of Commercial Agreements

Drafting & Management of Commercial Agreements

Part - 1 Agreements in Private Equity & Venture Capital Investment Deals

Part - 2 License & Technology Transfer Agreements

Drafting & Management of Commercial Agreements

Agreements in Private Equity & Venture Capital Investment deals

1. Investment Instruments - Preference / Equity Shares

Drafting & Management of Commercial Agreements

Exits IPO M&A Strategic sale

Drafting & Management of Commercial Agreements

Some specimen Boilerplate Clauses

Drafting & Management of Commercial Agreements

Some specimen Boilerplate Clauses

Drafting & Management of Commercial Agreements

License & Technology Transfer Agreements

Drafting & Management of Commercial Agreements

License & Technology Transfer Agreements

Drafting & Management of Commercial Agreements

License & Technology Transfer Agreements

Drafting & Management of Commercial Agreements

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