Updates to the model documents: A short guide to the new BVCA documents

Completion mechanics

Following on from the 2023 updates to the completion mechanics, which sought to provide more flexibility for closing investment rounds with multiple investors, the BVCA have included in the new subscription agreement a short form alternative to the normal completion mechanics to help simplify the process where 100% of the funds are expected to be received prior to completion.

Whilst a useful change to help simplify the process, the draft will require amendment to reflect deal practicalities, including funds flow mechanics.

It is also interesting to note that in the event an Investor has not advanced its subscription monies by the longstop date, the shortform alternative provides that “the Company and [the Lead Investor][Subscriber Majority] may agree to proceed to Initial Completion as between all parties other than the Defaulting Investor(s)” – the company also has the power to “immediately by written notice terminate a Defaulting Investor’s right to invest after the Longstop Date”.

The level of power given to the board in these circumstances will need to be considered by investors, particularly where thresholds for investment are required (and an area of focus for regulated businesses where changes to percentage thresholds can inadvertently trip regulatory thresholds), and indeed whether the ‘non-defaulting investor(s)’ are comfortable to proceed to closing in these circumstances; at the election of the company and lead investor/subscriber majority.

Regulatory actions

As a further update to the completion provisions, the BVCA have added an optional ‘further assurance’ type provision which provides that if the transaction may be subject to regulatory investigation or is called in under the National Security and Investment Act 2021 (NSIA), the company and the founders will assist with the required filings and actions.

This signals a further step in the right direction in recognising the importance of NSIA considerations (noting the broadening of the warranty scope in the 2023 updates, which saw a warranty covering the applicability of NSIA).

From our perspective, this is reflective of market-practice and consistent with how advising firms have sought to address the NSIA in an investment context since it came into force. However, the provisions may require development where NSIA is more likely than not to be applicable. Some investors may also require more comfort in this regard than a further assurance style provision can provide.

Warranties

The intellectual property, business systems and data protection warranties have been revised (including to add new definitions of “Know How” and “Patents”), whilst entirely new artificial intelligence (AI) and insolvency warranties have been added in the new subscription agreement.

These changes are welcomed as they are in keeping with broader trends. However, again, deal specifics are likely to still come into play and the importance of the insolvency warranties may need to be enhanced in the limitations section, for example in 6.1(b) of the subscription agreement.

There have been improvements to the provisions in the new subscription agreement relating to adherence. The BVCA has clarified that adhering shareholders (i.e. those Investors that subscribe for additional new shares after the execution date) shall “benefit from the Warranties as if they were parties to this agreement on the Execution Date”. This helpfully draws out the position incoming investors would typically expect to see.

On awareness, the following wording has been removed “and also such knowledge as each of the foregoing should reasonably have, in each case, assuming the proper discharge of their duties in their respective roles with the Company”, meaning that facts that such individuals “ought to have known” may no longer be captured by the qualifier. The BVCA has, however, included a concept for a requirement to make reasonable enquiry of certain individuals which does go some way to broaden the net of coverage if the list of named knowledge holders is narrow.

It is interesting to note that the BVCA has not back peddled on its February 2023 amendment which refocused the warranty liability on the company as sole warrantor (rather than both the company and the founders), which, as we expected, was one of the more contentious negotiation points coming out of the 2023 updates with many investors still requiring founders to stand behind the warranties and disclosure process.

Similarly, the BVCA, as part of its February 2025 updates, did not take the opportunity to insert a provision dealing with a requirement for investors to commence proceedings on a claim within a certain period of initial notice, so the resulting possibility of claims hanging over the company remains.

Strategic investors

Optional language has been added in the board provisions of the new shareholders’ agreement which restricts information rights for strategic (i.e. non-finance) investors in certain circumstances (at the board’s option “acting reasonably and in good faith”), including where the information concerns a particular matter on which there is a conflict of interest between the intended recipient and the bona fide interest of the company and where disclosure of advice provided by the company’s legal counsel in contemplation of a legal dispute could jeopardise attorney client based privilege.

Whilst this may be a hot topic for companies, we expect investors will push back on the optional wording, opting instead for the usual disclosure requirements.

Director indemnification

The BVCA has also added optional language in the new shareholders’ agreement for the company to undertake to indemnify an investor director (either by entering into an indemnification agreement with the investor director or by indemnifying the investor director directly).

The delivery of an indemnification agreement has been included (albeit also as optional wording) in the new subscription agreement as an execution condition. This optionality across both model documents is a promising sign for investors of how the market is moving.

Undertakings

The already optional EIS/VCT undertakings have been softened by further optional language, making the undertaking subject to the fiduciary duties of directors. Whilst this is welcomed, companies may still see some resistance from investors, who will be concerned with ensuring that EIS/VCT requirements are not dictating the company’s actions. If not an outright push back, we may see further softening of these undertakings in circumstances where parties agree to the optional language.

The BVCA also made revisions to and added additional undertakings in the schedule of undertakings in the new shareholders’ agreement relating to anti-bribery, anti-money laundering, anti-tax evasion, sanctions, governance and financial policies and procedures. It is interesting to note that the BVCA has not included specific provisions dealing with the upcoming ‘failure to prevent fraud’ offence, a new corporate criminal offence which will hold large organisations to account if they profit from fraud and which is set to come into force in the UK on September 1, 2025.

Other investment and business opportunities

A new clause has been added providing that investors are not restricted from investing in companies which compete with the company, subject to certain conditions (including that there is no disclosure by the Investor of company confidential information).

We have seen to date that investors will typically seek to include something similar and so it is a good sign that the BVCA has acknowledged in its updates that the nature of venture capital investing is such that investors will likely already have and continue to make investments in competitors of the company.

Variation of share rights

Language has been added in the new shareholders’ agreement (as well as in the new articles) concerning variation of rights, presumably to address the concerns that arose in DnaNudge Ltd v Ventura Capital GP Ltd (following the publication of the 2023 model documents), in which the automatic conversion of preferred shares into ordinary shares under a mechanism in the articles (taken from the BVCA model articles at the time) was held by the Court of Appeal to be void.

The judgment raised doubts as to whether other instances of automatic share conversion, or removal of rights attaching to a class, could require class consent before taking effect.

Bad leaver

Further updates have been made to the leaver provisions as the BVCA has removed the resignation limb in the definition of “Bad leaver” (which was optional) meaning resignation is not a bad leaver event. The rationale cited by the BVCA was that the working group rarely tended to see resignation used as a bad leaver event. As resignation as a bad leaver event does still feature in some deals, this should be addressed in the early stages of negotiation.

It is interesting to note that there has been no corresponding new “intermediate leaver” concept, which some investors require and which should also be addressed at an early stage if sought by investors.

Economic rights

The liquidation preference mechanics have also seen follow on updates, this time to clarify how the mechanics work and are applied in practice and to provide further clarity that the preference is non-participating. We think that the drafting could benefit from further refinement to avoid duplication, but this can be addressed on a deal-by-deal basis.

An amendment has also been made so that the Board (acting reasonably and in good faith with investor majority consent) may now determine the exchange rate (where relevant) in the waterfall.

The anti-dilution protection provision has also undergone clarificatory changes to include language widely used in practice relating to different starting prices and to clarify that the investor majority can waive such protection in whole or in part in certain circumstances.

While it is helpful to have a ‘market position’ concerning the application of such economic rights, we expect that the language may require fine tuning on a deal-by-deal basis around, for example, time limits and ensuring investors are part of the various consent rights.

Sanctions

There has been an addition of a “Sanctioned Person” definition in the new articles and restrictions on the transfer, allotment or issues of shares to a “Sanctioned Person”. This is a welcome change and reflects investor concerns in this area. However, we expect that investors are likely to look for updates to be made to these definitions, in keeping with their own internal compliance requirements.

Other notable points to consider

A provision has been included in the new articles which removes the ability for shareholders to exercise their reserve power to direct the directors to act by special resolution, if such direction conflicts with any one of the model BVCA documents. It is not clear what has prompted the BVCA to make this (albeit optional) update.

There are various instances throughout the new articles where the BVCA has included adjustment mechanics at board/investor majority discretion, including for example, on the classification of a major investor and new securities. As with other updates relating to decision making and consents, we expect investors will be looking to ensure they are part of any such decision making.

On the topic of decision making, changes have been made to the cosale provision in the new articles such that investor directors are disenfranchised from decision making, which investors will likely resist.

It is separately interesting to note that that the BVCA has included board (with investor majority consent) approval for the onward permitted transfer of shares by a permitted transferee, which seems overly restrictive and may be met with some push back.