Defaulting investors have had an impact on companies such as BillDesk, Byju’s, Zetwerk, and Swiggy.
According to executives who spoke on the condition of anonymity and were familiar with the potential offers, BillDesk, Byju’s, Zetwerk, Goqii, and Swiggy are a few of the firms that have seen investor default over the past six to eight months.
The investment arm of South African company Naspers, Proses NV, stated on Monday that it was giving up on its $4.7 billion all-cash acquisition of payments technology provider BillDesk after the protracted deadline to finalize the deal expired.
In a similar vein, Zetwerk announced on December 29 that it had raised $250 million from several investors, including Iconiq Capital, in a deal that valued the company at $2.7 billion; however, two people with knowledge of the matter claim that Iconiq Capital did not follow through with the capital commitment. Iconiq and Zetwerk did not reply to requests for comment.
Two people with knowledge of the incident claim that Sumeru Ventures’ deal to buy Swiggy’s shares was also terminated since the fundraising effort was unsuccessful. Swiggy declined to respond.
Byju’s said in March that it had struck deals with two venture capital firms, Oxshott Ventures and Sumeru Ventures, to raise $800 million from investors. But the edtech platform asserted in July that a $250 million payment that was anticipated from these two investors never arrived.
According to the news website Morning Context in July, Sumeru did not also support the health technology company Goqii. Sumeru also declined to comment. After performing due diligence or at the term sheet stage, investors frequently pull out of projects. Trading agreements and contractual duties are typically concluded before traders depart.
“You didn’t have to commit omission errors as an investor in 2021.” “You do not need to make fee errors in 2022,” says Kashyap Chanchani, managing partner at investment bank Rainmaker Group who has advised Internet companies on financing.
“Handshakes are now obsolete. Cash in the bank is effective. Given the unpredictability, he expected that this trend will extend at least until the next quarter, if not longer.
Lawyers emphasized that companies do have options, but that the process would be drawn out and likely include contract law. Shareholders of BillDesk have picked AZB & Partners and Shardul Amarchand & Mangaldas to look at legal possibilities that could compel Prosus to complete the $4.7 billion purchase, according to a report released on Monday.
According to Yashojit Mitra, partner at the law firm Economic Laws Practice, “strictly speaking, if an investor has decided not to proceed with the transaction after execution of definitive paperwork, then target and/or promoters have a right to provoke legal action against the investor and, if the information helps, even claim particular performance of the contract.”
However, many investment contracts have “significant adverse change” or “condition precedent” clauses that provide investors with a way out. According to Mitra, “Typically, investors would argue that some of the conditions that were set forth as prerequisites for investing have not been met and, as a result, they are not obligated to contribute.
This could happen if investors believe the company has diverged significantly from the plans set when they invested. This can happen, by Mitra, if fund managers are required to make capital contributions as a result of geopolitical or global recessionary difficulties.
Many traders also agree to a precedent clause that states that their investment would be subject to “investment committee” approval, which they may successfully utilize if they decide internally not to make investments, according to Mitra.
Numerous lawyers claim that there are countless such cases of startups that have not yet gotten the promised money. The specifics of such transactions have not been disclosed.
“We are experiencing multiple incidents of investors pulling out of a legal deal,” says Saurav Rajgarhia, associate, IndusLaw. He stated, “However, there are circumstances where the MAC isn’t explicitly specified; at times, the contract may imply that a 10–20% fall in valuation due to missed progress milestones would constitute a MAC.”
The majority of contracts have a “specific performances” clause, which enables a judge to require the investor to fulfil the agreement. According to Rajgarhia, the company might be able to sue for damages under the contract if the investor decides to leave. Depending on the specific deal at hand, he added, startups wouldn’t have much of a choice if the protracted cutoff date passed before the contract could be finalized.
It would rely on the contract’s remark as to whether it requires both parties to “endeavour towards the deal conclusion” if official approvals are waiting, he continued.
In the long run, companies might decide not to devote as much effort to pursuing these legal actions against investors and instead choose to concentrate on the business. According to Abhishek Sharman, founder and managing director of Carpediem Capital, sometimes they may not have the resources to pursue it quickly enough in court before the money runs out for business operations.
Startups may have protections and rights in their contracts, but they may not have the money to stand up for themselves in many situations. Sharman asserts that businesses might not have the time to wait for legal action to convince an investor to pay the agreed-upon amounts.