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Understanding Funding and Financing through the CVCA – Part 5: The Ancillary Documents, Supplementing the Financing

We are excited to bring you another installment in our series exploring the Canadian Venture Capital & Private Equity Association (CVCA) model documents. In previous weeks, we’ve unpacked some of the core CVCA agreements including the Term Sheet, the Subscription Agreement, and the three Shareholders’ Agreements.

This week, we’re reviewing the ancillary documents included in the CVCA suite. These documents don’t show up in all deals and are not necessarily executed by all the parties to the financing, but they are nonetheless important to understand as potential components of a financing transaction.  

Legal Opinion

A legal opinion, provided by the legal counsel of the company raising capital, is often required as a closing condition by investors who want additional comfort on fundamental company matters. The document typically sets out the context in which the opinion is being provided, including underlying facts, assumptions, and qualifications, and addresses matters such as the existence of the company, its authority and ability to enter the financing transaction, its capitalization, and the availability of a securities exemption for the transaction. In essence the legal opinion confirms that the company is investment-worthy from a legal standpoint.

A legal opinion may increase the steps to and expenses of closing because of the additional diligence the company’s legal counsel will need to perform to provide their opinion. Startups should therefore seek to clarify investor expectations early in the deal process and identify whether an opinion letter is necessary.

Indemnification Agreement

Lead investors often negotiate for board seats in connection with their investment and fill the seats with directors they nominate. All directors, including those nominated by investors, owe a fiduciary duty to the company they serve and can attract personal liability in their director role in various ways. To address the personal risk for their nominees, investors may require the company enter into an indemnification agreement with their director nominee.

Indemnification of directors and officers is generally permitted, but not required, under Canadian corporate law. While some companies make indemnification obligatory under their corporate by-laws or other constating documents, indemnification agreements provide directors and officers with more secure protection because these agreements cannot be amended without their consent (unlike the company’s constating documents).

Management Rights Letter

Some investors may also require the company provide a management rights letter, in which the investor receives enhanced information rights, including access to the company’s management, the right to examine the company’s records and receive material the company provides to its board of directors. These rights augment the rights generally provided to investors under the other CVCA Model Documents, particularly the Investors’ Rights Agreement.

While not the main event, these documents are important for founders to understand and navigate, and being aware of investor expectations early on can help the transaction along to a smooth close. Join us next week for the final instalment of Understanding Funding and Financing through the CVCA as we discuss the Share terms. If you’re wondering what to expect for your financing or have questions about the ancillary CVCA docs or any of the CVCA docs, we’d love to chat.

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