What’s New in the NVCA Model Legal Documents—And What’s Next?

The National Venture Capital Association’s model legal documents are industry-standard venture capital financing documents that act as a baseline for emerging and venture capital companies, consisting of the certificate of incorporation (charter), stock purchase agreement, investors’ rights agreement, right of first refusal and co-sale agreement, and voting agreement as well as other ancillary documents. The model documents are widely used in the marketplace—for both very early and late-stage companies—and there can be tremendous movement within the documents depending on the stage of the company and the investor.

Despite deal-specific variance and negotiation, the model legal documents provide a common-ground starting point to help emerging company and venture capital transactions move more efficiently.

UPDATE TIMELINE

The updates to the model documents have been more frequent as of late. The bulk of the updates came in 2023, with additional amendments in January, April, and July of 2024 to address developments in Delaware case law, particularly regarding the Moelis decision. We expect further updates to the model documents may continue to be forthcoming as practitioners and dealmakers react to amendments to the Delaware General Corporation Law that have since been passed into law in response to Moelis as well as in response to other ongoing Delaware case law.

MOELIS DECISION

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., the Delaware Court of Chancery held that a number of provisions in a stockholder agreement between a company and its founder were facially invalid because they unlawfully constrained the board’s discretion in violation of DGCL § 141(a). These provisions required the board to obtain the founder’s consent before taking various actions, limited the board’s discretion over board size and composition, and required the board to ensure significant founder representation on all committees.

The court held that under DGCL § 141(a) such constraints on the board’s ability to exercise its judgment may only be implemented through amending a company’s certificate of incorporation. The case is likely to embolden challenges to provisions in stockholder and activist settlement agreements that grant a particular investor, or its director designee, special governance rights.

That said, Delaware’s Legislature passed amendments to the DGCL in June 2024, partially in response to Moelis, and these amendments were signed into law by Governor John Carney on July 17, 2024, to become effective on August 1, 2024 (and will apply retroactively).

Among other things, these amendments, which are incorporated into a new subsection 18 to DGCL § 122, are intended to effectively overturn the ruling in Moelis to authorize the entry into stockholders’ agreements which do not violate a company’s certificate of incorporation or the DGCL if the provisions of such stockholders’ agreements were otherwise included in the company’s certificate of incorporation. In order to comply with existing case law, the amendments require that companies must obtain some form of consideration for entering into such stockholders’ agreements, such as placing restrictions on stockholder actions or transfers.

KEY PROVISION UPDATES

Certificate of Incorporation

• Direct Listings: In a change responsive to market norms and trends, there is now an option in the model legal documents for a direct listing to have the same treatment as an initial public offering, which would allow for a mandatory conversion of preferred stock into common stock.
• Officer Liability: In response to a change in Delaware case law, the law is now permitting companies to clear officers from fiduciary duty liability, and the model legal documents now include optional language to reflect such change.
• Moelis: The Moelis decision impacted how companies and stockholders think about negotiating stockholder rights and which document memorialize such rights. To the extent that a company’s investors’ rights agreement will include mandatory covenants restricting the board of directors, companies should still be aware that entering into such an agreement will be subject to the board of directors’ exercise of its fiduciary duties under the DGCL as the amendments do not address a board of directors’ fiduciary duties in entering into, performing, or exercising its rights under such agreements. That said, DGCL § 122(18) provides a bright-line authorization for contractual provisions addressing the stockholder rights called into question by Moelis and therefore would negate the Moelis ruling, which held that contract stockholder provisions of such a nature which restrict board of director actions must be included in the certificate of incorporation to be valid. Ultimately, DGCL § 122(18) should curb the concerns of companies, stockholders, and dealmakers that Moelis would continue to invalidate and prohibit certain mandatory covenants that may restrict the board’s ability to freely manage the affairs of a company.

Stock Purchase Agreement

• Convertible Security Mechanics: Some new mechanics address withholding obligations and others give the company protection with respect to minor deviations in formulas for the number of shares issued.
• Company Representations: Various company representations have been enhanced to reflect market norms and have also been built up to reflect that companies are doing more business outside the United States, there are more investors from outside the United States, and more companies are doing business across more regulated industries.

Investors’ Rights Agreement

• Cash Management Policy and Annual Budget: The updated investors’ rights agreement retains language obligating the company to deliver to investors an annual budget approved by the board but flips it from an optional, bracketed choice to instead be a mandatory obligation. The updated investors’ rights agreement now also includes optional language that the company must adopt a cash management policy.
• Commitment to Diversity: There is now an optional covenant that ties into larger efforts across companies in their commitment to diversity, equity, and inclusion.
• Moelis: The NVCA states companies should be thoughtful about putting covenants in the certificate of incorporation where they want to ensure stockholders have control or could make decisions that would otherwise fall to the board. As noted above, this concern may largely be mitigated in response to the DGCL amendments recently passed by the Delaware Legislature and governor, subject to ongoing fiduciary duty considerations by the board of directors of a company.

Voting Agreement

• Successors and Assigns (Board Rights): One of the most important provision changes in the voting agreement, there is now default language and an explanatory footnote providing that the rights to designate a board member do not transfer to an assignee of the shares (so if the parties to a deal want this right to transfer, they would need to modify the NVCA form).

CONCLUSION

The updates to the model legal documents reflect evolving norms in the venture capital industry and updates to state and federal laws applicable to venture-backed companies in the United States. There will be adjustments in the marketplace as parties digest, react to, adopt, and tweak the new model language. Preferences will emerge on adoption of specific points. The model legal documents are intended to serve as a starting point and should be tailored by a legal professional to align to the specific transaction and deal points. Continue to monitor for further updates to ensure you are using the most recent model forms.

For more on the 2023 & 2024 model legal documents updates >>