The National Venture Capital Association (NVCA) has recently updated the model it uses for legal documents to address the implications of the ruling in the West Palm Beach Firefighters' Pension Fund vs. Moelis case.

The revisions carry implications for corporate governance and transactional processes in venture capital-funded companies. 

Model Certificate of Incorporation: Article SIXTH, Clarifying the Role of Preferred Directors

Article SIXTH has been changed and remodeled to provide much-needed clarity on the role of Preferred Directors in board decisions. The revised article includes an outlined optional provision that stipulates when Preferred Directors must be included on board committees.

While this sounds good, there is a carve-out for situations where the Preferred Director has a conflict of interest. For many investors, this revision requires their Preferred Directors to be part of specific committees, and this new language should be incorporated.

Plus, the NVCA highly recommends in footnote 86 that if investors mandate the formation of certain committees (like audit or compensation committees), such requirements should be specified within this section of the Certificate of Incorporation.

Model Stock Purchase Agreement: Section 4.7: Board Committee Requirements

The revisions made to the Model Stock Purchase Agreement introduce optional language in Section 4.7 concerning board committee requirements. This revision pushes for the formation of committees that can be closed on condition.

The streamlining of these processes allows for the comparison of formed committees post-transaction. However, it's advisable that if an investor expects the creation of these committees, it is more effective to embed these requirements in the Certificate of Incorporation.

With this, the condition to closing not only ensures the permanence of the condition post-closing but also the ability of the dissolving committees post-transaction.

Model Investor Rights Agreement: Revisions and Implications

Most of the NVCA's updates are concentrated in the Investors’ Rights Agreement (IRA). The changes (collectively referred to as the "Impacted Provisions") include:

• Section 5.1: Post-closing insurance policies

• Section 5.4: Actions Affecting Qualified Small Business Stock Status

• Section 5.6(b): Audit and Compensation Committee requirements

• Section 5.8: Successor indemnification

• Section 5.9(b): Actions regarding company sale

• Section 5.9(d): Joint defense/common interest agreement

• Section 5.12: Anti-harassment policy

• Section 5.13: Diversity, Equity, and Inclusion (DEI) policy

• Section 5.14: Compliance with the Foreign Corrupt Practices Act (FCPA)

• Section 5.15: Cash investment and management policy

• Section 5.16: Cybersecurity requirements

The NVCA emphasizes the balance of provisions outlined in the IRA through the new footnote 79. While these don't directly impact the Moelis decisions they do push for a balance when it comes to the commercial outfits.

New Section 5.20: Fiduciary Duties Clause

To ensure proper and adequate mitigation of any concerns raised by the Moelis decision regarding the Impacted Provisions, the NVCA introduced Section 5.20. The new section 5.20 states that the impacted Provisions are subject to the board's fiduciary duties.

The changes are designed to ensure that the covenants don't impose any unenforceable limitations on the board's governance powers. If any impacted Provisions conflict with the board's fiduciary duties, the fiduciary duties take precedence, rendering the limiting provision unenforceable.

But with all this in line, if an investor deems any of the provisions very important, it is prudent to have them include the Certificate of Incorporation for greater enforceability.

Implications for Corporate Governance and Transactions

The revisions made by the NVCA reflect the strategic responses to ensure that venture-backed companies can navigate the complexities introduced by the Moelis decision. These key governance provisions are subject to fiduciary duties.

NVCA aims to ultimately balance both investor protections and the legal obligations of board members. Companies and investors are crucial to carefully review these updated model documents and consider incorporating necessary provisions into foundational documents like the Certificate of Incorporation to ensure they align with both legal requirements and business objectives.

By understanding and integrating these changes, companies can better manage their governance processes and safeguard their operations against legal challenges, thereby fostering a more stable and predictable investment environment.