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IMPORTANT NOTICE: This document is for guidance only and is not a substitute for appropriate legal advice. Wright Johnston & Mackenzie LLP or Scottish Enterprise shall not be liable for any actions taken based on the information contained in this document.MODEL TERM/ INSTRUCTION SHEET
[On Investor’s Headed Notepaper]
[INSERT NAME] Limited[INSERT DATE]
[address]
Dear Sirs
Proposed Investment in [INSERT NAME] Limited (the “Company”)
This Term Sheet sets out the principal terms on which [certain members of [INSERT NAME OF GROUP]] will make an investment (the “Investment”) in the Company. [Our investment partner in this investment will be Scottish Enterprise – the Scottish Co-Investment Fund (“SE”)]. [INSERT NAME OF GROUP] [and SE shall collectively be referred to as] the “Investors”]. This Term Sheet is subject to contract and due diligence and it is not legally binding with the exception of Clauses 5, 6, 7 and 9(Exclusivity, Confidentiality, Fees and Expenses and Governing Law).
TABLE 1: SHAREHOLDINGS IMMEDIATELY PRIOR TO INVESTMENT
SHAREHOLDER / ORDINARY SHARES / [PREFERENCE SHARES] / % SHAREHOLDING
TABLE 2: SHAREHOLDINGS IMMEDIATELY FOLLOWING INVESTMENT
SHAREHOLDER/ SYNDICATE / ORDINARY SHARES / [PREFERENCE SHARES] / % OF FULLY DILUTED SHARE CAPITAL
TOTAL SYNDICATE SHAREHOLDING
[TABLE 3: SHAREHOLDINGS AFTER AND ASSUMING FULL EXERCISE OF OPTIONS/FOLLOWING SECOND TRANCHE]
SHAREHOLDER/ SYNDICATE / ORDINARY SHARES / [PREFERENCE SHARES] / % OF FULLY DILUTED SHARE CAPITAL
TOTAL SYNDICATE SHAREHOLDING
1GENERAL
Company Details / [INSERT NAME] Limited
Registered Number: [INSERT NUMBER]
Registered Office: [INSERT ADDRESS]
(Contact details are set out in Appendix 3)
Type of Business / [INSERT BRIEF DESCRIPTION] [NB: Check EIS compatible]
Target Completion Date / [INSERT DATE]
Management/ Founders / [INSERT DETAILS]
Existing Share Options/ Warrants / [INSERT DETAILS]
Business Plan Date/ Description / [INSERT DATE/ DESCRIPTION]
Objective / Implementation of Business Plan and [Exit] [next round financing] within [INSERT NUMBER] years of completion
2INVESTMENT
Lead Investor / [INSERT DETAILS]
Co-Investors / [INSERT DETAILS]
[SE: SE’s investment shall be subject to and conditional upon investment by [CO-INVESTMENT PARTNER]
Post- Money Valuation / The Company is (subject to due diligence) being valued at a post-money valuation of approximately £[INSERT SUM]for its entire issued share capital (on a fully diluted basis and including all options or rights to subscribe for shares)
Subscription Amounts / Investor: [INSERT SUM/ NUMBER & TYPE OF SHARES] [%]
[SE]: [INSERT SUM/ NUMBER & TYPE OF SHARES] [%]
Premium (if any) / £[INSERT SUM] per share
Investment Tranches / Tranche 1[INSERT AMOUNT/ DATE]
Tranche 2[INSERT AMOUNT/ DATE]
Tranche 1 Milestones
Tranche 2 Milestones / [INSERT BRIEF DETAILS/ DATES]
[INSERT BRIEF DETAILS/ DATE]
Share Options/Warrants / [INSERT DETAILS OF NEW OPTION SHARES, %, OPTION PRICE, RELEVANT DATES]
Loan Notes/Loan Details / See Appendix 1
Conditions Precedent / The Conditions Precedent listed in Appendix 2 will need to be satisfied prior to completion
To be EIS Compliant? / [YES] [NO]
Return of Capital Provisions / [INSERT DETAILS]
3LEGAL STRUCTURE/ INVESTOR RIGHTS
Investor Director/ Observer / [SE and [Lead Investor]]/ [the Investor Majority] shall have the right to appoint [INSERT NUMBER] investor directors. [Each Investor] shall have the right to appoint an Observer.
Investor Majority / [INSERT DETAILS OF THRESHOLD/ PARTIES REQUIRED TO MAKE UP AN INVESTOR MAJORITY]
Investor Protections/ Controls / Investor protections as detailed in Appendix 2 will be required
Information Requirements / Information shall be provided to the Investors as set out in Appendix 2
Warranties / Warranties shall be provided to the Investors as set out in Appendix 2 (plus any warranties required as a result of due diligence)
Voting Rights / [One vote per Ordinary Share/ INSERT DETAILS OF WEIGHTED VOTING IF REQUIRED] [NB: 29.9% limit on SE’s shareholding]
Dividend Policy / [No dividends to be declared or paid without the consent of the Investor Majority [until the Loan has been repaid in full.] OR [Not less than % of profits available shall be paid in dividends to the shareholders in each year provided that this does not jeopardise any EIS relief].
Drag Along / Typical Drag Along Provisions will be required.
Tag Along / Typical Tag Along Provisions will be required.
Good Leaver/Bad Leaver Provisions / Good Leaver and Bad Leaver provisions as set out in Appendix 2 will be required
Pre-emption Rights / Standard pre-emption rights will be required [SE: Standard and unfettered pre-emption rights]
4OTHER
Disclosure Letter / First draft to be submitted by[INSERT DATE] [NB: Date at least 10 days prior to the Target Completion Date]
Key Man Insurance / £[INSERT SUM] on the lives of [INSERT DETAILS] for the benefit of the Company
Service Agreements / Service Agreements (including suitable restrictive covenants agreed by the Investors) to be entered into [by each following member(s) of the Management Team]:- [INSERT DETAILS]
Directors Loan Balances / [INSERT DETAILS] [to be paid prior to Completion]
5EXCLUSIVITY
In consideration of our proceeding with due diligence and incurring fees, expenses and other costs (including professional fees) in relation to the Investment you undertake that from the date of acceptance of this proposal until [INSERT DATE] you will not enter into negotiations with or contract with or provide any information concerning any investment in the Company to any third party without the consent of [INSERT NAME] on behalf of the Investors. You will further ensure that your officers, employees, agents and advisers comply with the undertaking contained in this Clause 5. In the event that [INSERT NAME] confirms in writing to the Company that the Investors do not wish to proceed with the Investment, the Company shall be released from the remaining exclusivity period.
6CONFIDENTIALITY
6.1The information provided between the parties to this Term Sheet in relation to the Investment (including information relating to the business or affairs of any other party to this Term Sheet) and the existence and contents of this Term Sheet are confidential (all of such information in whatever form the same may exist being (“Confidential Information”)). Each of the parties to this Term Sheet shall keep all Confidential Information confidential (and ensure proper and secure storage of such Confidential Information) and none of the parties to this Term Sheet shall reveal or disclose any Confidential Information, make use of any Confidential Information other than for the purpose of the Investment or make any announcement or press release in relation to the Investment except with the agreement of the relevant party in writing. The provisions of this Clause 6 do not apply to any information which is required to be disclosed by law, becomes generally available to the public (other than as a result of a breach of this Clause 6) or becomes available to the relevant party otherwise than pursuant to this Term Sheet.
6.2Each party to this Term Sheet shall take only such copies of any document or other material (in whatsoever medium) embodying any Confidential Information from another party as are reasonably necessary for the purposes of the Investment.
6.3Each party will restrict access to the Confidential Information to its responsible employees and professional advisers who need to have access for the purposes of the Investment.
7FEES AND EXPENSES
The Company, the Management [and SE] shall meet their own legal, professional and other costs and expenses incurred in respect of the Investment. [INSERT NAME OF GROUP]’s professional legal and due diligence fees shall be paid by the Company at completion of the Investment. In the event that the Investment does not proceed to completion for any reason (other than the Investors deciding not to proceed) the Company shall pay the Investors’ due diligence and legal fees and expenses incurred to that date.
[The Company shall pay to [INSERT NAME OF GROUP] the sum of £ (plus VAT), as commission, [being % of the Investment], at completion of the Investment.] [NB: CONSIDER FSA IMPLICATIONS.] [SE: No administration fee shall be payable to SE.]
8[INVESTMENT DOCUMENTATION
[LEAD INVESTOR]’s solicitor will prepare the investment agreement and new articles of association for issue to the Company’s solicitor. Please note that we will not accept material changes to our standard investment documentation and the Company should instruct its lawyers accordingly and proceed with the Investment on this basis only.] [SE Note: You should also bear in mind that SE is a high volume investor and as such cannot accept material changes to its standard approach.]
9GOVERNING LAW
This Term Sheet will be governed by Scots Law and the parties hereto exclusively submit to the jurisdiction of the Scottish courts in respect of any disputes that may arise hereunder. [SE: Scots Law requirement]
This indicative offer will remain open for acceptance until 5.00 pm on . Please indicate your acceptance by signing and returning the enclosed copy of this Term Sheet to .
Executed for and on behalf of
at on…......
20 by
(Director)
before the undernoted witness
…...... Witness
…...... Full Name
…...... Address
…......
Executed for and on behalf of
at on…......
20 by
(Director)
before the undernoted witness
…...... Witness
…...... Full Name
…...... Address
…......
Executed by each of the Directors
aton20
……………………………………………………. (Director: [Insert Full Name]
……………………………………………………. (Director: [Insert Full Name]
……………………………………………………. (Director: [Insert Full Name]
All in the presence of the following witness:
……………………………………………..Witness
……………………………………………..Full Name
…………………………………………….Address
APPENDIX 1
[DETAILS OF LOAN NOTES AND LOAN REPAYMENTS]
LOAN NOTES
NOTE HOLDER / TYPE OF LOAN NOTES / INTEREST RATE / REPAYMENT DATES (CAPITAL AND INTEREST) / CONDITIONS / SECURITYLOAN
SUM OF LOAN / DRAWDOWN DATES / DRAWDOWN CONDITIONS / REPAYMENT DATES (CAPITAL/INTEREST) / INTEREST RATE / SECURITY
APPENDIX 2
LEGAL STRUCTURE/INVESTOR RIGHTS
The following information is included for information and guidance only. Full provisions relating to the following matters will be contained in the Investment Agreement/ Articles of Association.
1Conditions Precedent
The Investment shall be conditional upon certain conditions being met at or prior to Completion. These may include (but shall not be limited to) the Investors being satisfied with:
1.1the terms of an Investment Agreement, Articles of Association and all associated documentation;
1.2due diligence investigation and due diligence reports;
1.3the finalisation of the Company’s management/statutory accounts for the period to [INSERT DATE] and the Company’s accounting systems, procedures and controls;
1.4the Business Plan;
1.5the unconditional availability of any other funds set out in the Business Plan or the Investment documentation;
1.6any third party consents (including any bank consents) having been obtained;
1.7warranties customary for a transaction of this kind, being provided on a joint and several basis by Management [and the Company] in relation to information provided including (but without limitation) the statutory and management accounts, trading position and forecasts of the Company;
1.8to the extent it is not already owned by the Company, the Business being transferred or licensed to the Company including, without limitation, all existing intellectual property rights developed for or used in the Business on or prior to the date of completion of the Investment;
1.9[the investment being a qualifying investment under the rules of SE];
1.10[provisional clearance for the trade of the Business being granted for the purpose of Enterprise Investment Scheme relief, and such relief being available in respect of the Investment;]
1.11diligence on, and service agreements for, the Management;
1.12the lease or title to the Company’s premises (if any) and all licences or permits needed to carry on the Business being in effect;
1.13insurance being in place in respect of the Business and its assets; and
1.14[INSERT OTHERS AS APPROPRIATE].
2Information Requirements
The Investors shall require to be provided with certain information in relation to the Company within certain time periods as agreed by the Investors. This will include (but shall not be limited to):
2.1accounts (audited where applicable and including accountants’ reports) and management accounts in a format approved by the Investors;
2.2prior to the start of each financial year, a business plan, budget, financial projections and cashflow forecasts in terms and covering such periods as the Investors may reasonably specify (to be approved by the Board);
2.3such other financial or management information as the Investors may reasonably specify; and
2.4notice and minutes of all Board meetings.
In the event that any of the above information is not forthcoming to the Investors within the relevant time period, [any of the Investors] shall be entitled to appoint accountants to examine the Company’s books, accounts and any other information not provided to them. [THIS IS A STANDARD INVESTOR REQUIREMENT.]
3Investor Director/Investor Protections
[SE and [LEAD INVESTOR]/ [the Investor Majority] shall be entitled to appoint [up to two/ INSERT NUMBER] Investor Directors to the Board [and shall be entitled to appoint the Chairman of the Board]. Certain matters will be subject to the approval of the Investor Director(s) and certain matters will require the consent of the Investor Majority. These matters may include (but shall not be limited to) the following:
Investor Director Matters
3.1materially amending the Business Plan or incurring any capital expenditure not included in the Business Plan;
3.2acquiring or selling any asset or property of the Company at an aggregate price exceeding [INSERT PERCENTAGE]% of the net asset value of the Company or exceeding £[INSERT AMOUNT], whichever is the greater;
3.3making any loans or giving any guarantee or indemnity;
3.4entering into or altering any service agreements or altering the benefits payable to or receivable by any Director or employee (including the Management);
3.5approving the statutory accounts of the Company;
3.6appointing or removing the Company’s auditors or bankers;
3.7altering the Company’s accounting reference date;
3.8borrowing any money over £[INSERT AMOUNT] other than in the ordinary course of business;
3.9incurring any professional fees not included in the Business Plan; or
3.10purchasing, licensing, or otherwise acquiring or selling, licensing or otherwise disposing of any intellectual property rights otherwise than in the ordinary course of business.
Investor Majority Matters
3.11appointing any person other than the Management and the Investor Director to the Board or removing any director;
3.12issuing any shares otherwise as permitted in the Investment Agreement;
3.13the declaration or payment of any dividend;
3.14the grant of any guarantee or indemnity;
3.15the making of any material change in the nature of the Business;
3.16the commencement or settlement of any litigation;
3.17altering the Company’s Memorandum and Articles of Association;
3.18the use of the Investment for any purpose other than as set out in the Business Plan; or
3.19creating any encumbrance or borrowing any money secured or unsecured other than overdrafts or loans with any of the Company’s bankers.
Matters requiring SE Consent
The following matters shall always require the prior written consent of SE (whether or not such matters also require Investor Majority consent):
3.20the Company entering into any dealings which are not on an arms length basis; or
3.21the Company undertaking the expansion, development or evolution of the business of the Company otherwise than through the Company or a wholly owned subsidiary of the Company.
4Warranties and Indemnities
The Management [and the Company] shall be required to provide warranties commensurate with the type and nature of the Investment and appropriate in the circumstances of this transaction on a joint and several basis. These will include but shall not be limited to warranties in relation to the following:
4.1the management accounts and the audited accounts of the Company;
4.2the employees of the Company;
4.3accuracy of the information provided to the Investors during the diligence process (and reasonableness of assumptions and forecasts in the Business Plan);
4.4title to the Company’s assets;
4.5the Company’s intellectual property and the rights connected with the intellectual property;
4.6the key contracts of the Company;
4.7insurance;
4.8licences, permits, consents and authorities; and
4.9tax matters.
Limitations on the warranties appropriate to the transaction may be agreed but the aggregate liability of [the Company] and Management under the warranties shall not be less than the total sum of the Investment.
[Note: It is a standard investor requirement that Management and in most cases the Company give warranties on a joint and several basis and that the Investors must be able to recover losses arising from breach of the warranties at least to the level of their investment. Certain limitations on such warranties may be agreeable but the level of these limitations will depend upon the circumstances].
5Good Leaver/Bad Leaver Provisions
Management will be subject to compulsory offer round on cessation of employment/resignation unless the Investors otherwise agree. Good leaver/ Bad Leaver provisions will be contained in the Investment Agreement and Articles of Association regulating the value that will be attributed to Managements’ shares in the event of any of them leaving the Company as either a director or employee. The circumstances under which a person will be deemed to be a Bad Leaver will include the following:
5.1[a member of Management ceasing to be an employee and/ or director of the Company within [INSERT NUMBER] years of completion;]
5.2a member of Management leaving the company in circumstances justifying dismissal in circumstances not constituting unfair or wrongful dismissal; and
5.3[a member of Management committing a post-cessation breach of any restrictive covenant].
Good Leavers will be persons who are not Bad Leavers and will apply to a member of Management leaving the Company by agreement or as a result of death, permanent incapacity, unfair or wrongful dismissal or retirement at usual retirement age.
A Bad Leaver will be entitled to receive [the lower of the fair value (as determined in accordance with the Articles) or the issue price of the shares]. A Good Leaver will be entitled to receive fair value for their shares.
Any permitted transferee’s shares (family etc) will require to be offered round if the Manager from whom the shares derived ceases to be employed/ an officer of the Company.
APPENDIX 3
CONTACT DETAILS
Contact Details
Principal Contact, Tel: , Fax: , Email:
Solicitors acting for Investment GroupTel: , Fax: , Email:
Solicitors acting for Company/
ManagementTel: , Fax: , Email:
Accountants acting for CompanyTel: , Fax: , Email:
Bankers/FundersTel: , Fax: , Email:
Solicitors acting for Bank/FundersTel: , Fax: , Email: