Diana Ribeiro Duarte, Pedro Capitão Barbosa and Maria João Bernardes are the authors of the article “Venture capital: practical aspects of the relationship between management companies and promoters”, published by FundsPeople. The article opens a series of four opinion pieces by Morais Leitão dedicated to practical issues identified in the area of fund formation, particularly in the context of advising venture capital fund management companies.
The relationship between promoters and management companies
In this first article, our lawyers analyse the relationship between promoters and fund management companies, against a backdrop in which the venture capital fund management model involving the active participation of promoters has gained increasing prominence in the Portuguese market.
Practical experience shows that the contractual framework between the parties is sometimes undervalued at the fund launch stage, even though this is precisely when the conditions for a stable relationship and the prevention of future conflicts should be established.
Replacement of the management company and approval of annual accounts
Among the main conflict scenarios, the article highlights the replacement of the management company and the blocking of the approval of the annual accounts by the promoter.
The replacement of the management company may raise a number of issues, ranging from possible compensation for the outgoing entity and the interim period until the replacement becomes effective, to the replacement of members of the corporate bodies of portfolio companies, KYC and KYT processes, and access to the information required to audit the fund’s assets.
Failure to approve the annual accounts may also have regulatory and business consequences, particularly in terms of reporting obligations, profit distributions and financing.
Prevention as the starting point
The authors therefore argue that the management regulations and the agreement between the promoters and the management company should define in advance the terms governing each party’s exit, mechanisms for resolving deadlocks and transparent access to information.
For promoters, this clarity should be ensured before the partnership begins. For management companies, the contractual robustness of the relationship with promoters is also a differentiating factor and a relevant criterion to consider before committing to the launch of a venture capital fund.
This is the first of four articles that Morais Leitão will publish by the end of the year on practical issues in the area of fund formation.
Read the full article here.
