Recent Revisions to NVCA Series A Model Legal Documents (part 2 of 3)

This post is the second of a three-part series looking at the current NVCA Series A  model legal documents.

The National Venture Capital Association (“NVCA”) has created and maintained a standardized, industry-embraced set of model documents that can be used as a starting point in venture capital (“VC”) financings.  These model documents are intended to reduce the time and cost of financings and to free principals from the time consuming process of document review, allowing them to instead focus on the high level issues and trade-offs of the deal at hand.  The NVCA model documents can be found here.

Due to the changing dynamics of the industry, state law an other considerations to improve the model documents from their previous updated in 2014, the NVCA General Counsel Advisory Board (the “Advisory Board”) was recently created to update the model legal documents and to provide guidance to the NVCA on policy matters impacting VC and VC-backed companies. Several of the Advisory Board’s significant changes to the aforementioned documents are detailed below and in our other posts.

Changes to the model Amended and Restated Certificate of Incorporation (“COI”)

• Initial Coin Offerings (“ICO”). The drafters have added a protective provision (Section 3.3.5) requiring an affirmative vote of the requisite Series A shareholders before the company may sell, issue or distribute digital tokens or cryptocurrencies. Given the erratic nature of crypto valuation, there is an inherent logic in including a protective provision limiting a board of directors’ ability to issue digital currencies, since some VC investors might be uncomfortable investing in a company that intends to employ a cryptocurrency strategy.
• Interest. Under Delaware law, a board of directors can decide not to redeem preferred stock if the company does not have the economic surplus to do so, or if redemption would threaten the company’s ability to function as a going concern, neither of which are precisely defined. Delaware courts have concluded that the board of directors shall use its business judgment to make this determination, which grants great discretion to the board and offers little certainty to VC investors looking to make certain that a redemption will go through as promised. To combat this, the revised model COI punishes a company should its board decide that a full redemption is not in the company’s best interest. Newly added Section 6.4 provides that if any preferred stock is not redeemed for any reason, all unredeemed shares are to remain outstanding and entitled to all of their rights and preferences. The company is further required to pay interest on the redemption price at the maximum rate allowable under applicable law.
• Series A Director Protective Provisions (Article Sixth). This newly added provision states that the matters listed in the Investors’ Rights Agreement requiring the approval of the Series A shareholders designee on the board of directors cannot be approved without the approval of such director. Adding this to the model COI invalidates any board action in violation of this requirement. Conversely, an action taken in violation of the Investors’ Rights Agreement is still valid, but subjects the company to a breach of contract claim.
• Indemnification of Officers and Directors (Article Eleventh). This provision, as revised, specifies that any modification of this Article can only be prospective in effect.

Changes to the model Voting Agreement

• Conditions on Drag Along. Under the revised model Voting Agreement, shareholders are not subject to the drag along obligation if they are required: (i) to enter into a non-compete or non-solicitation provision; or (ii) to terminate non-financing related agreements with the company (Sections 3.3(b) and (c)). Additionally, a provision was deleted that, as a condition to the drag along, required the investors’ liability in connection with the sale to be several and limited to sale proceeds.
• Bad Actor Covenants. The model Voting Agreement now contains expanded requirements to verify that investors are not Bad Actors under Rule 506(d).
• Consent to Electronic Notice. A new notice provision was added (Section 7.7(b)) whereby the parties consent to electronic notice pursuant to Section 232 of the Delaware General Corporation Law.
• Arbitration.  The model Voting Agreement also adds the option of arbitration under the DRAA (Section 7.16).