Where a new joint venture (Newco) is set up and intellectual property is transferred from one (or more) parties (normally a university or other research organization) to it, in addition to a contract regarding the transferred intellectual property as I described in my previous article, a further document will be required addressing the issues arising from  each of the parties taking an equity stake in Newco.

Contents of agreement

The shareholders' agreement should set out what needs to happen in order to complete the transferring (also known as spin-out) process. This will include provisions relating to:

• The shares subscribed or to be subscribed by the founders and the consideration payable by them;
• The intellectual property agreement to be entered into by the university and Newco, and the shares to be issued to the university by way of consideration for this;
• The subscription by any investors of shares in the company and the issue and allotment of such shares to them; and
• The appointment of any additional directors (including the university director and/or the investor director).

The parties including the individuals, the university and investors will also need to consider the associated tax treatment and any available relief carefully.

Day-to-day management and specific rights

While the investors will wish to have board representation to monitor the running of Newco and their investment, universities for various reasons are satisfied to appoint an observer to the board.In addition to this, minority shareholders will have the power to veto key company decisions, such as the decision to: (i) change the nature of Newco's business or its constitution; (ii) sell the company; (iii) acquire another business or assets; (iv) take on new investors which would dilute the existing shareholdings of the parties; (v) remove certain key personnel; or (vi) wind up the company.Investors will also need to ensure that they have some control over any further dilution of their existing shareholding. So, they will often require any further issue or transfer of shares in the company to be first offered to the existing shareholders pro rata to their shareholdings.

University and the investors will also want to ensure that they will be able to participate in an exit by way of share sale of the company. So, in the event of an offer made by any party which will result in a change of control in the company, usually meaning an offer which is accepted by the holder of more than 50% of the shares in the company, if the minority so require, they can oblige the shareholders who have accepted such offer not to accept it unless such offer is extended to all of the shareholders on the same terms and at the same price as was made to them.

Restrictions on the individuals

As the continued participation of the individuals is crucial to the success of the spin out joint venture, the investors will generally be keen to secure the long term commitment of the individuals to Newco and prevent them from doing anything to damage the interests of the company (whether or not they continue to participate in the company).

The long term commitment of founders can be secured using a combination of service agreements or consultancy contracts with initial fixed term periods with some further restrictions including:

• Positive obligations to act in the interests of the company at all times;
• Restrictive covenants imposed not to have any competing interests or to be engaged or involved in any competing businesses (whether directly or indirectly) while they participate in the company (either as an employee, consultant, officer or shareholder);
• Restrictive covenants imposed following their participation in Newco preventing them from: (i) being engaged or involved in any directly competing businesses for a specified period; (ii) soliciting employees of the company for a specified period; (iii) soliciting customers, clients or suppliers of the company for a specified period; (iv) representing themselves as having any connection with the company other than as a former employee, officer or shareholder.