Information rights clause: what investors are told and when

Sample clause

a shareholders agreement for Wombat Payroll Systems Pty Ltd, a fictional Canberra software company with two founders and three investors, the largest holding 18 per cent

10. Information Rights 10.1 The Company must give each Major Investor, being an Investor holding at least 5 per cent of the Shares: (a) monthly management accounts, including a profit and loss statement, balance sheet and cash position, within 20 Business Days after the end of each month; (b) the annual budget at least 30 days before the start of each financial year; (c) audited annual financial statements within 120 days after the end of each financial year; and (d) an updated capitalisation table within 10 Business Days after any issue or transfer of Shares. 10.2 The Company must notify each Major Investor within 5 Business Days of any litigation, regulatory investigation or event that could reasonably be expected to have a material adverse effect on the Company. 10.3 A Major Investor may inspect the Company's financial records on 10 Business Days notice, at its own cost. 10.4 Each Investor must keep all information received under this clause confidential.

Sample wording, not legal advice.

Variants

What to negotiate

• Who qualifies

  Investors want information rights for every holder they bring in. Founders prefer to limit detailed rights to major investors above a percentage or investment amount, and to exclude competitors from receiving sensitive information at all. The common settlement gives detailed monthly information to major investors and a quarterly or annual summary to everyone else.

• Audit cost

  Audited accounts are a real cost for a young company that may not otherwise need an audit. Founders ask for reviewed rather than audited accounts until revenue or funding reaches a threshold, or for investors to meet the cost. Investors with their own reporting obligations often insist on an audit from the first year.

• Confidentiality and competitors

  Information flows freely only if the company trusts it will stay inside the investor's fund. Companies ask for confidentiality obligations, a ban on sharing with competing portfolio companies, and the right to withhold trade secrets. Investors accept those while keeping the right to report to their own investors in summary form.

• When the rights end

  Information rights designed for a private company clash with continuous disclosure after a listing, where selective disclosure to some holders creates problems. Clauses therefore usually end the rights on an initial public offering, and sometimes when the investor's holding falls below the qualifying threshold for a set period.

The risk of leaving it out

Without an information rights clause, a minority shareholder in an Australian proprietary company has no general right to inspect the financial records, and a small proprietary company may not have to prepare an annual financial report unless holders of at least 5 per cent of the votes direct it to. An investor can learn about a cash crisis at the same time as the creditors.

The report table in words

A practical schedule for a young company runs like this. Monthly management accounts go to major investors within 20 business days of month end. A quarterly update on revenue, customers, cash burn and runway goes to all shareholders within 30 days of quarter end. The annual budget goes to major investors 30 days before the financial year starts, for board approval. Audited or reviewed annual accounts go to all shareholders within 120 days of year end. An updated capitalisation table goes to all shareholders within 10 business days of any change, and material events are notified to major investors within 5 business days.

Statutory rights are narrow

The Corporations Act gives members limited information rights. Members can inspect the share register and the minute books, but can inspect the financial records only if the directors or a general meeting authorise it, or a court orders it. Holders of at least 5 per cent of the votes in a small proprietary company can direct it to prepare a financial report and directors' report. In the UK, companies must send annual accounts to every member, and in Delaware stockholders can demand to inspect books and records for a proper purpose.

Where it sits in a generated document

A generated shareholders agreement can set out the reports, deadlines and recipients as a table inside the information rights clause, with the confidentiality obligation as a numbered sub clause beneath it. Deadlines and thresholds are written in as content. The document does not cite the Corporations Act, so statements about statutory inspection rights in a draft should be checked.

Documents that carry this clause

Shareholders agreement templateA veterinary diagnostics company has just taken $1.5 million from one seed fund. The founders keep 80 percent between them, so the whole agreement turns on a single number: the 75 percent consent threshold that puts the investor on one side of every decision that matters.Joint venture agreement template with contributions and splitAn unincorporated joint venture has no company to fall back on, so everything a company structure would supply has to be written down. This one puts two builders together for a single $14.6 million refurbishment, splits it 55/45, and sets out who funds it, who decides, how a deadlock breaks and how either of them gets out.

Questions people ask