Drafting

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Drafting Management of Commercial Agreements
in Private Equity Venture Capital
DealsLicense Technology Transfer Agreements
AN INTERACTIVE SESSION Organized by PHD Chamber
Gurgaon Chamber of Commerce and Industry (GCCI)
29th April 2008 Hotel Fortune Select Global,
Gurgaon
SAMEER RASTOGIIndia JurisInternational Law Firm
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Drafting Management of Commercial Agreements
Part - 1
Agreements in Private Equity Venture Capital
Investment Deals
Part - 2
License Technology Transfer Agreements
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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals
Object ?
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.
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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
IMPORTANT CLAUSES ISSUES

• Investment Instruments - Preference / Equity
  Shares

• Board Representation

• Voting Rights

• ESOPS

• Intellectual Property Rights

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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.

• 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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.

• Representations Warranties

• Material Adverse effect clause

• Information Rights

• Exits

• Liquidation preferences

• Dispute Resolution

• Boilerplate Clauses / Standard clauses

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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
1. Investment Instruments - Preference / Equity
Shares
section 80, 80A, 85

• 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

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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
14. Representations Warranties RW
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 RW being
inaccurate
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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
15. Exits

• IPO
• MA
• Strategic sale

16. Dispute Resolution

• Litigation / Arbitration
• India or abroad
• Governing laws procedure

Outside India may be costly and
inconvenient to entrepreneur
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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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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Drafting Management of Commercial Agreements
Agreements in Private Equity Venture Capital
Investment deals .. Cont.
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
www.indiajuris.com

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Drafting Management of Commercial Agreements
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.

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Drafting Management of Commercial Agreements
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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Drafting Management of Commercial Agreements
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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Drafting Management of Commercial Agreements
License Technology Transfer Agreements
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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Drafting Management of Commercial Agreements
License Technology Transfer Agreements
IMPORTANT CLAUSES ISSUES .. Cont.

• Revocability
• Territory
• Sub-licensing
• Advertising Promotion
• Audit of accounts from outside agency
• Royalty Payment and Calculation

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Drafting Management of Commercial Agreements
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