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IV What terms may be included in a Term Sheet? continued
be left for board consent. Alternatively, each of the largest investors may have specific consent
rights. The purpose of these rights is to protect the investors from the company taking actions
which may adversely affect the value of their investment.
The types of actions covered include (among many others): changes to share classes and share
rights, changes to the company’s capital structure, issuance of new shares, mergers and acquisitions,
the sale of major assets, winding up or liquidating the company, declaring dividends, incurring debts
above a certain amount, appointing key members of the management team and materially changing
the company’s business plan. These shareholder rights are particularly important for investors who
do not appoint a director to the Board of Directors (see paragraph 16 below).
Note that in some Continental European jurisdictions, local company law requires that some of
the actions covered by these consent rights remain the unfettered right of the Board of Directors
to decide. In such cases, the Articles of Association of the company will usually require that the
level of majority needed for a board decision concerning these actions include the agreement of
an appropriate number of the directors appointed by the investors.
Alongside these consent rights, there are usually various undertakings or covenants given by the
company or sometimes the founders to do certain acts. Typically these include taking steps to
protect intellectual property, applying investment monies in accordance with the business plan
and maintaining appropriate insurance. Other types of covenants are described in the sections
below headed Information Rights (see paragraph 17 below) and Confidentiality, Intellectual
Property Assignment and Management Non-compete Agreements (see paragraph 20 below).
16. Board of Directors/Board Observer
Venture capital investors require that the company has an appropriate Board of Directors
(note: in some Continental European jurisdictions, e.g. Germany, a two-tiered board is required:
a Management Board and a Supervisory Board and in other Continental European jurisdictions
where two-tiered board systems are optional, e.g. France, some investors prefer one board).
In accordance with what is regarded as UK corporate governance best practice, investors
usually prefer the Board to have a majority of non-executive directors (i.e. directors who are
not employees of the company). Although a majority of non-executives may be impractical for
small companies, it is usual for such companies to have at least one or two non-executives. One
or more of the non-executive directors will be appointed by the investors under rights granted
to them in the investment documentation. Some investors will never appoint a director, because
of potential conflicts of interest and liability issues and will instead require the right to appoint a
Board Observer, who can attend all board meetings, but who will not participate in any board
decisions. The Board of Directors tends to meet once a month in general, in particular for early
stage companies with active investors on the Board.
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