Our legal terms
Two of the biggest reasons that small and medium sized companies cite for not investing for growth are, that raising capital is too time-consuming, too onerous and too expensive, and that they do not want to lose control.
We are doing everything we can to reduce both the burden and the costs, from looking to provide a swift response to any initial enquiry to only commissioning due diligence in areas that really matter. Over the past few months we have made tremendous strides.
One area we have spent a great deal of time looking at is our approach to the legal process and our legal terms.
We are not private equity; we are growth capital investors, and the difference in our approach and therefore the legal protections that we look for is significant.
For example we will only take a minority stake in your Company. Sitting on a Board with a minority voting rights is very different from sitting there with ultimate control. That doesn’t mean we need more protections, just different.
We also can’t force you to sell your business. That should happen at the right time for the business, not an arbitrary one enforced by an investor or funding cycle. We want to be your partner in the decision to sell.
Finally, we want the investment process and legal completion to be efficient just as much as you do; BGF wants to be an active investor in hundreds of companies in the years ahead.
So we decided to start from scratch. With a blank sheet of paper we wrote out the terms that a growth capital investor should need. Terms that we believe are transparent, easily understood and fair, and that we are happy to openly share with the legal community. We apply the same key investment and legal terms to all our deals.
The protections that we look for all have a very specific purpose and play a very important part in enabling BGF to make an investment.
This article provides an overview of the key legal terms and the principles behind them. We are also very happy for your lawyer to get in touch with the BGF legal team directly for a more detailed discussion.
Essentially there are FIVE scenarios where we, as a long-term minority investor, look for some legal protection.
1) You don’t tell us what is happening
2) You leave the business
3) You haven’t been straight with us
4) You don’t keep your side of the agreement
5) You change your mind about the future of the business
You don’t tell us what is happening
This is a very simple one. As shareholders with a significant financial investment at stake we want to know how the business is performing, what direction it is heading in and what strategic decisions need to be made.
We are very clear that we are not looking to run your business, nor do we need to be involved or even kept informed of the myriad of small choices that have to be made day to day. We want to be aware and involved in the major decisions, as laid out and agreed in the Business Plan and budgets.
In order to put some loose parameters around this, to help give some formal structure to the relationship which we think helps to set expectations for both parties from the outset, we want to see four things in place:
- A seat on the Board and regular Board meetings: A member of the BGF team will take a seat on the Board as a non-executive director.
- Regular financial information: budget information, and monthly and 6-monthly financial summaries.
- An Independent Non-Executive Chairman or Director. Sometimes a strong Chairman is already place. However, in our experience bringing in a new face with a highly relevant base of knowledge and skills can help the business to achieve more. Through our Talent Network (insert link) we have access to a large number of experienced directors with industry skills who can bring enormous added value and help companies to execute their plans and achieve their growth potential. Any appointment is made with your full involvement and can be one of the most transformational elements of the investment.
- An agreed set of decision areas that require Board discussion and BGF shareholder consent. These decisions can be seen in four broad groups: decisions involving raising more external finance or selling existing shares; decisions to commence litigation; decisions to make acquisitions, embark on joint-ventures or other formal partnerships; and decisions to wind up or sell the business. Known as the Investor Consents, these are by definition decisions that sit outside the previously agreed Business Plan and budget.
In the usual course of events decisions of this magnitude would be discussed at the Board and the BGF Investor Director will be in a position to provide the required approval. Therefore the requirement for any consent should not act as a constraint or limiting on the business.
You leave the business
We know how important your business is to you, and we know that selling any part of it is a big decision. But as a potential minority partner we also know how important you are to your business. In fact it is our belief in you, and your senior management, that will be one of the most critical elements when we make our decision to invest. That is the judgement we need to make.
So as you can imagine we want to know you will remain committed to the business.
And if you or any other key shareholding director does leave, we need to have a plan. To secure the future of the business and to protect the interests of all the existing shareholders (including you), staff and customers, a new CEO/senior hire will have to be made quickly.
The legal provisions in this area ensure that there is a sensible level of equity available to the Company in this circumstance to attract a high quality candidate.
You haven’t been straight with us
This is another simple one. We are determined to keep the costs of raising money to a minimum and so we don’t look to carry out comprehensive and very expensive due diligence on every aspect of the business. Instead we focus only on the areas that we believe matter most to the effective execution of the strategy we are backing.
However, we do want some reassurance that there is nothing untoward that we should know about before we invest; nothing that is being hidden from us. So we ask you to sign up to a set of statements (warranties) about the operations of the business. You can tell us if any of these aren’t correct by giving us a disclosure letter which details anything we should know. This protects the directors because we are aware of all issues upfront.
The warranties that you give then stay in place for the next couple of years.
You don’t keep your side of the agreement
Here we are looking at how BGF can protect its investment if you don’t keep your side of the agreement.
This might be a situation where previously considered protections, such as the investor consents are ignored, a director gives up on the company or gives cause for summary dismissal, BGF’s agreed interest and/or dividend is not paid, or other financial covenants are breached. In all these cases, and any of similar seriousness, we would hope and expect to be engaged and supporting you well before a point of no return. However, if we can’t work it out together, BGF may have to temporarily take certain additional rights to help us protect the value our shareholding.
You change your mind about the future of the business
This is after all a commercial arrangement. We are investing our money because we believe in your ability to grow the business and to build a valuable asset in the medium to long term. We are patient investors, and that growth may take many years, but of course at some point to crystallise any gain we need to realise our investment through a sale of the company.
We cannot force you to sell your business at any time. We also do not insist on day one that we begin working to a specific exit timetable. We recognise that sustainable growth sometimes requires patience as well as perseverance.
However, we are not a charity and we do not want to build an ever increasing portfolio of companies from which we never get any return, even if on paper our stakes are increasing in value. So with that in mind we agree a dividend policy that will ensure that BGF receives an appropriate annual return if the investment is held for a longer period of time.