Investment Agreement

What documents should constitute the Investment Agreement and what commercial terms will they address?

Explanation

There will be a large number of documents produced during the process of making an investment, for example shareholders’ and investor rights’ agreements, articles of association and loan agreements. These are collectively referred to in this Handbook as the Investment Agreement. The content of these documents will be influenced by many factors, for example local legal and regulatory requirements and tax and structural considerations, such as whether a minority or majority interest is to be acquired.

The documents will need to fully reflect all aspects of the agreed transaction and take account of the commercial terms that the GP has agreed with other shareholders (if any) and the portfolio company. It is common practice to set out in the Investment Agreement the roles of the GP, other parties and the management team of the portfolio company in relation to the governance and running of the portfolio company.

These commercial terms may address the following matters, although this varies depending on whether a minority or majority interest in the portfolio company is acquired:

• ownership and control of the portfolio company post-investment;

• share transfers (mandatory, permitted and prohibited) and pre-emption rights;

• incentives for the management team of the portfolio company and obligations imposed on them;

• division of managerial responsibilities following the investment;

• warranties, representations and indemnities;

• investment performance milestones and any future obligations to provide further funding;

• board and shareholder consents needed before specified actions are taken;

• agreements with lenders to the portfolio company and inter-creditor arrangements;

• quality, quantity and frequency of information that is to be provided;

• exit provisions such as tag-along or drag-along rights and/or compulsory sale provisions to resolve any deadlock regarding a sale, and also order of priorities on a liquidation¹;

• the consideration of ESG risks and opportunities².

There is a strong likelihood that local legal advice will be required in the drafting of the various documents constituting the Investment Agreement.

Recommendation

As explained above, a variety of matters should be considered when negotiating an investment to ensure that the legal documents reflect the commercial terms negotiated by the GP. The GP should consider using local legal advice on the appropriate manner for recording what has been agreed.

1. (i) a tag-along is a right for a shareholder to insist that his/her shares are bought on the same terms by the same purchaser as another shareholder who is selling his/her shares; and (ii) a drag-along right entitles a selling shareholder, such as a private equity investor, to require the remaining shareholders to sell their shares to a third-party purchaser on the same terms.

2. Typically management agrees to uphold ESG practices in accordance with local legislative requirements and industry good practice (including adherence to any voluntary ESG standards) and report on performance regularly. Where no local ESG framework has been implemented, management often agrees to work with the GP to identify and address any ESG risks and opportunities through implementation of a practical ESG framework.