July 24, 2024
Advising on an Investment Dispute: Settlement and Negotiation Strategy
- The Client, a Web 3 venture capitalist fund, engaged our services to advise on a dispute arising out of an investment agreement. The Client regularly invests in multiple companies against equity, new token issuances, or both.
- This dispute arose from an investment made in tranches in a start-up against the completion of specific milestones. The adverse party claimed against the Client that the investment was not made in the company in accordance with the terms of the investment agreement.
- The Client, thinking that the claim made against them was strong had negotiated a one-sided settlement agreement, not in their favour.
- Our advice was sought on the settlement agreement and overall dispute strategy.
- The negotiations were at a later stage, with a settlement agreement already drafted. The terms of the settlement agreement included very few protections for the Client, along with a clause nullifying any representations or warranties arising out of the original investment agreement.
- As part of the settlement, the Client was investing additional funds into the start-up. Being the lead investor in the start-up, the Client was inclined to settle the dispute.
- Our advisory team conducted a thorough analysis of the original investment agreement and the draft settlement agreement. We advised the Client that they had a better claim against the adverse party on account of certain breaches in the conduct of the adverse party. Understanding that any dispute resolution process may bankrupt the counter-party, for the purposes of negotiation, we highlighted a three-fold counter-argument for the Client:
- Argument 1: Delay in investment due to the adverse party’s inaction – The adverse party had not achieved certain milestones, which would have triggered the otherwise payable investment amount.
- Argument 2: Arguendo, incomplete notice of milestone fulfilment – We highlighted that even if the delay was not on account of the adverse party’s inaction, the original investment agreement required the adverse party to send a notice of milestone fulfilment as well as fulfil certain additional obligations. The notice was required to be in a specific format and required specific details. We highlighted that technical breaches of notice requirements by the adverse party weakened their claim for compensation.
- Argument 3: Breach of the agreement by the adverse party – Notwithstanding the above arguments, we outlined that the investment agreement required periodic reports by the adverse party, which, if not submitted, would entitle the Client to a full refund of the investment amount.
- While we highlighted that the settlement agreement was investor-unfriendly, we understood that, commercially, a claim was not the most feasible option. As such, we used the above arguments to insert protective measures for the Client, ensuring that the additional investment they were making was for the growth of the adverse party and and not repayment of any of the adverse party’s debts.
- After multiple rounds of rigorous negotiations with the adverse party, we inserted several protective measures for the Client. In the event of any breach of the terms of the agreement, the Client is ensured to have ample counterclaims.
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