Alternative Investment Structures

This resource is offered for information purposes only. It is not legal advice. Readers are urged to seek advice from qualified legal counsel in relation to their specific circumstances. We intend the resource’s contents to be correct and up to date at the time of publication, but we do not guarantee their accuracy or completeness, particularly as circumstances may change after publication. Toniic, the assisting pro bono law firms and the Thomson Reuters Foundation, accept no liability or responsibility for actions taken or not taken or any losses arising from reliance on this resource or any inaccuracies herein.

This analysis was provided by TozziniFreire Advogados

Related Content

The analysis for Brazil includes articles on Brazil Revenue Based Finance -Debt and Brazil Revenue Based Finance – Equity

Executive Summary

This research paper summarizes the main structures identified for revenue-based financings available in Brazil. 

While Brazilian laws does not provide for concepts that are designed specifically for revenue-based financing¹ , companies and investors may structure transactions by adjusting existing types of funding mechanisms available under existing regulations. For the purposes herein, we will suggest three types of structures, under equity, debt and receivables discount models:

Equity: investment by acquiring equity interest is one of the most common types of investment in Brazil. The acquisition of equity interest may occur by means of (i) execution of a share/quota purchase agreement, (ii) execution of a convertible loan, (iii) increasing the corporate capital by means of execution of an investment agreement, and (iv) incorporating a Brazilian subsidiary. Brazilian law provides for several types of legal entities, of which the Sociedade Limitada (limited liability company) and the Sociedade Anônima (corporation) are the most commonly used. Other company types are seldom used in practice, because most of them provide for unlimited liability of their partners. For limited liability companies and corporations, the partners liability is limited to their paid stake in the corporate capital and there are generally² no minimum capital requirements. Moreover, dividends are currently tax exempt in Brazil, regardless of the status of the beneficiary. In this type of investment, it is possible to ensure a minimum return by means of (i) defining the interest in the convertible loan agreement; (ii) a put option, granted in an agreement between the partners and the company; or (iii) using redeemable shares.

Debt: issuance of debentures. A debenture is a security issued by a corporation (sociedade anônima), with mechanics that are similar to bonds governed by New York laws. The terms and conditions of the issuance of the debentures are regulated in an indenture executed by the issuing company. The debentures are essentially fixed-income debt instruments where the debenture holders are entitled to receive the repayment of the principal amount plus an accrued interest (fixed or floating). However, Brazilian laws allow the issuing company to stipulate that debenture holders may have the right to receive a share in the company’s profits or even an additional premium fee, which is based on income or profit variations of the company. The investors are usually represented by a fiduciary agent (similar in nature to a trustee). Debentures are one of the most relevant debt instruments used by companies in the Brazilian capital markets. 

Receivables discount (securitization): funding granted by receivables investment funds (Fundos de Investimento em Direitos Creditórios – “FIDC”), which is a form of condominium regulated by the Brazilian Securities Commission (Comissão de Valores Mobiliários – “CVM”). The FIDC is a fund whose main purpose is to purchase receivables from Brazilian entities, and it benefits from technical and specialized services of administration, portfolio management and custody of the investments, provided by regulated entities.  The FIDC is funded by investors, which in turn receives quotas issued by the FIDC. Although the FIDC (and investment funds in general) operate similarly to companies, it does not have a legal personality. Earnings from investments are distributed to FIDC’s quotaholders. On the other hand, the FIDC’s quotaholders also bear losses and other expenses that compose its liabilities. The FIDC is a viable way of ensuring that companies obtain cash by anticipating their receivables (revenues) without incurring in additional debt.

Members of TozziniFreire Advogados are qualified to practice law in the Federative Republic of Brazil.  We do not express herein any answer concerning any law other than the law of the Federative Republic of Brazil.

Equity Interest

Investment Structure Summary

For investment in Brazilian companies, it is possible to (i) incorporate a Brazilian subsidiary or a joint-venture; (ii) acquire quotas/shares held by third parties in a Brazilian entity; (iii) subscribe new quotas or shares in a Brazilian company, by means of a capital increase; or (iv) execute a convertible loan with an existing company.

Category

Equity

Category for tax purposes

Equity investors are compensated either via dividends or gains on the sale of quotas/shares. Dividends are currently tax-     exempt in Brazil, regardless of the status and location of the beneficiary. Capital gains are generally subject to progressive rates ranging from 15% to 22.5%, but actual rates vary depending on the shareholder’s status and location (see Critical Tax Considerations below).

Governance Rights

The owner of the equity interest in Brazilian companies is usually entitled to vote in quotaholders/shareholders resolutions and its voting rights will depend on the percentage held in the Brazilian entity and rights negotiated in the shareholders/quotaholders’ agreement. The lender of a convertible loan will acquire voting rights only after the conversion of the loan, but it is possible to protect the investor with early maturity of the debt.

Investor Qualification Requirements

In general, there are no restrictions on qualification of the investors of Brazilian companies. However, there are specific qualification requirements for investments in certain companies performing regulated activities (e.g., banking, energy, telecommunications, among others).

Also, the investor needs to be enrolled with the Brazilian tax authorities and the Brazilian Central Bank (in case of foreign investors).

Foreign investors must also appoint a Brazilian resident representative as its corporate attorney-in-fact, with powers to receive summons, and also a legal representative before the Brazilian Internal Revenue Service, as required by Law No. 6404 of December 15, 1976.

Currency Considerations

The payment of the corporate capital of the Brazilian entity must be in Brazilian reais. Also, any capital increase of the Brazilian entity made by foreign entities in other currency will need to be converted into Brazilian reais, by means of a foreign exchange agreement, registered with the Brazilian Central Bank.

In case of acquisition from third parties, the payment can be made in another currency.

Collateral

Not applicable

Priority Payment Rights

It is possible to issue preferred shares or quotas in Brazilian entities, with priority in the distribution of dividends or priority in case of liquidation of the company. The issuance of preferred shares is limited to 50% of the company’s voting corporate capital.

Distribution and Redemption Limitations

In order to distribute dividends to its shareholders/quotaholders, the Brazilian entity must have accrued profits in its financial statements sufficient to offset any losses from previous fiscal years, so that the positive difference may be distributed.

Therefore, prior to any distribution, the dividends received in the current fiscal year must be used to reduce the losses from the previous fiscal years and then the balance could be remitted to the shareholders/quotaholders.

It is possible to set a fixed percentage of profits to a partner in a shareholders/quotaholders’ agreement, in order to ensure a minimum capital return.

The payment of the convertible loan is not subject to the existence of profits by the company.

Legal limitations to pricing or total return

Not applicable to limited liability companies. For joint-stock corporations, the issuance price of the shares shall be established without any unjustified dilution of the interests of previous shareholders, even if they have a right of first refusal to subscribe to the shares, taking into account, either alternatively or jointly (i) the profit expectation of the corporation, (ii) the net worth of shares, (iii) the quotation on the stock exchange or organized over-the-counter market, taking into account the premium or discount value due resulting from market conditions, according to Law No. 6404 of December 15, 1976.

For accommodating revenue-based financing, for closely-held companies, it is possible to provide in an investment agreement the schedule of payments of the investor and grant a put option against the invested company or the current partners, in which the put option price will be calculated in accordance with financial indexes, such as revenue, EBITDA, or any other formula to calculate the repayment, using thresholds and payment in installments. In addition, for both closely held and public companies, it is possible to issue common or preferred redeemable shares, provided that the bylaws provide the redemption price, conditions and if the corporate capital will be reduced or not. The redemption price should be calculated using the same criteria as the issuance price mentioned above and the company shall use its profits, its reserves or its corporate capital to pay such price.

Status in Insolvency Proceedings

In case of insolvency of a Brazilian entity, the shareholders/quotaholders are not considered creditors and will only receive any amounts if there outstanding balance after the payment of all creditors.

The lender of a convertible loan, on the other hand, is considered a creditor and an early maturity of the debt in case of insolvency, judicial/extrajudicial recovery or bankruptcy is used to protect the investor.

Limitation of Liability

The investors’ liability is limited to the amount of the corporate capital of the Brazilian entity. 

If the corporate capital of the limited liability company is not paid-in, all quotaholders are jointly liable, limited to the amount of the corporate capital.

The lender of a convertible loan is not exposed to the company’s liabilities.

Transfer Restrictions

There are no general transfer restrictions of shares/quotas provided in Brazilian law. Transfer restrictions are usually provided in the shareholders/quotaholders’ agreement of the Brazilian entity. The most common provisions are:

1. Right of first offer;
2.  Right of first refusal;
3. Lock-up

Critical Tax Considerations

Dividends are currently tax exempt in Brazil, regardless of the status and location of the beneficiary.

Taxation of capital gain on the sale of shares/quotas may vary depending on the shareholder status and location. Brazilian individuals and foreign investors not located in a tax haven jurisdiction will usually be subject to progressive rates ranging from 15% to 22.5%, depending on the size of the gain. The rate is 25% for foreign investor located in a tax haven jurisdiction. Taxation of Brazilian legal entities will vary according to the legal entity’s tax regime. A foreign investor duly registered with Brazilian Central Bank as portfolio investor (Resolution 4.373) and not located in a tax haven jurisdiction will be afforded with capital gain exemption if the sale is carried out in the stock exchange. 

1.  For the purposes of this research, as instructed, “revenue-based finance” means a funding/finance arrangement under which the investor has a priority right to receive repayment/distributions up to an agreed portion of “gross revenues” or “free cash flow”, until an agreed return on the investment is reached (whether or not the investor continues to participate in the equity upside after that)..
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2. Certain regulated sectors, such as the banking and insurance sectors, do impose minimum capital requirements. Therefore, it is recommended      to      double-checked this aspect from a regulatory standpoint. ↩︎

This resource is offered for information purposes only. It is not legal advice. Readers are urged to seek advice from qualified legal counsel in relation to their specific circumstances. We intend the resource’s contents to be correct and up to date at the time of publication, but we do not guarantee their accuracy or completeness, particularly as circumstances may change after publication. Toniic, the assisting pro bono law firms and the Thomson Reuters Foundation, accept no liability or responsibility for actions taken or not taken or any losses arising from reliance on this resource or any inaccuracies herein.

The Germany content consists of this summary page, and separate pages for Preferred Shares in a German Limited Liability Company (“GmbH”), Silent Partnership in a Corporation, and Debt.

Executive Summary¹

In the German (debt/equity) market there is no classical “revenue-based finance” in the sense of a (customary) shareholders’/finance arrangement under which the investor has a priority right to receive repayment/distributions up to an agreed portion of “gross revenues” or “free cash flow”, until an agreed return on the investment is reached. However, the following three options come closest thereto: (1) preferred shares in a German Limited Liability Company (“GmbH”), (2) a silent partnership in a German corporation (GmbH or a stock corporation (“AG”)) or (3) a loan to a GmbH, AG or a limited partnership by shares (Kommanditgesellschaft auf Aktien (“KG aA”)) in combination with a warrant against the company’s/borrower’s shareholder(s) to call for shares (or, alternatively, to opt for a cash settlement) upon a specific trigger event.

Preferred Shares in a GmbH entitle the holder of such shares to a preferred treatment in regards of the priority of distribution of profits among the shareholders, i.e., the other (ordinary) shareholders accept that the investor has a right to repayment by way of distributions of profit (based on the revenue of the GmbH) and that such right needs to be discharged prior to other (ordinary) shareholders receiving their portion of the (remaining) amount to be distributed. Distributions and redemptions are limited by capital maintenance provisions applicable under German law to ensure that the GmbH’s funds in the amount of its registered share capital (Stammkapital) are not diminished by any profit distributions.

A silent partnership in a German corporation is an undisclosed civil law partnership. It can be designed with or without membership rights. In both scenarios, the investor participates in the corporation’s profit. In the typical case of a silent partnership, membership rights are excluded, and the investor solely participates in the corporation’s profit, for which reason the silent partnership is considered a debt instrument. The atypical silent partnership includes membership rights and/or entitles to participate in hidden reserves. Therefore, for tax and insolvency purposes, it is categorized as an equity instrument.

The combination of a loan to a GmbH, AG or KG aA combined with a warrant against its shareholder(s) combines a debt and an equity instrument. The warrant to call for shares or, alternatively, to opt for a cash settlement is mostly designed in the form of a right to demand release of proceeds. Usually, the warrant is designed without any membership rights or equivalent influence in order to avoid subordination in an insolvency scenario.

In any of the three options contestations by an insolvency administrator of repayments/distributions made to the investor needs to be considered on a case-by-case basis in the light of German insolvency law. For the instruments qualifying as equity or the investor qualifying as a shareholder or as shareholder like – which can only be assessed on a case-by-case basis -, investor’s claims are subordinated pursuant to German insolvency law.

Withholding tax on payments received by the investor is triggered in case of preferred shares. In case of the other instruments, it needs to be assessed on a case-by-case basis (details below). 

This resource is offered for information purposes only. It is not legal advice. Readers are urged to seek advice from qualified legal counsel in relation to their specific circumstances. We intend the resource’s contents to be correct and up to date at the time of publication, but we do not guarantee their accuracy or completeness, particularly as circumstances may change after publication. Toniic, the assisting pro bono law firms and the Thomson Reuters Foundation, accept no liability or responsibility for actions taken or not taken or any losses arising from reliance on this resource or any inaccuracies herein.

Revenue-based Debt

Investment Structure Summary

Investor makes a loan to Company with periodic payments sized based on actual revenues, which loan may or may not be secured. 

While most credit is extended based on projected cash flows, the parties may agree specifically that periodic (e.g. semi-annual) debt service payments of principal and interest are made in cash up to an agreed percentage of revenues received since the last payment date. Any principal and accrued interest remaining outstanding must be repaid on the final maturity date.

The Company will pay interest on the debt on each payment date up to the amount corresponding to the agreed percentage of revenues received in the corresponding period. The parties will typically agree that, if such amount of revenues is not sufficient to pay all of the accrued interest, interest in excess of that amount is paid-in-kind, by issuing new debt in the same amount or simply capitalizing the unpaid interest by adding it to the outstanding principal amount. Distributions to equity holders are usually not permitted unless the Company is satisfying specific financial tests, including as to meeting early amortization targets and debt service.

If the relevant portion of revenues is in excess of accrued interest, the Company would typically be required to apply the excess revenues up to the agreed percentage to prepay principal on each payment date.

This structure is essentially a form of cash sweep arrangement. While the amount of the cash sweep may be tied to a percentage of revenues as described above, debt documentation will often permit the borrower to pay operating and other critical expenses agreed to be necessary to keep the business running prior to paying debt service, sometimes setting out a cash waterfall for narrower controls over the allocation of cash in each payment period. 

This arrangement is beneficial to the Company and the Investor in that it offers protection for the Company against cash shortfalls for the payment of debt service prior to maturity, while mitigating the repayment risk at maturity by applying excess cash flows to prepayment. However, it is critical for parties to make sure the agreed terms will leave sufficient cash in each period to allow the Company to meet ordinary course expenses that are necessary to run its business, at the risk of the cash sweep jeopardizing the Company’s ability to generate future revenue. While this type of funding may be supported by a percentage of gross revenues, in effect the cash flows available for repayment are likely to be limited by the borrower’s operating margin.

There is a range of features that can be agreed to mitigate Investor’s risk and achieve better pricing from the Company’s perspective or longer tenors, including:

• Collateral security, in particular as it relates to the Company’s accounts where revenues are received;
• Account waterfall, where Company can only make payments from the secured accounts as agreed with Investor;
• Debt service reserve accounts, where the Borrower may be required to deposit cash remaining after the cash sweep in each period, until a target amount is reserved (e.g. one or two periods of debt service). The reserved amounts can be used to pay accrued interest in cash during low revenue periods;
• Budget approval requirements to allow the Investor to control the amount of essential expenditures to be paid prior to debt service in the waterfall;
• Restrictions on dividends and other distributions consisting of financial tests designed to prevent cash leakage in case of low business performance; and
• Investor access to equity upside, either by making the debt convertible into shares or other equity interests based on a pre-agreed share pricing framework, or having the Company issue warrants exercisable at maturity for the Investor to acquire shares or membership interests in the Company. 

Category

Debt (and equity to the extent of any permitted debt convertibility or warrants in the structure).

In the U.S., the IRS may deem certain debt transactions as “disguised” equity transactions, recharacterizing interest payments as equity distributions to disallow interest deduction by the Investor. Similarly, U.S. courts may recharacterize debt positions as equity, downgrading them in priority in bankruptcy, where debt has priority over equity.

There are a range of factors that may expose a debt transaction to recharacterization as equity, although the threshold for courts to do so is considered relatively high. In the bankruptcy space, federal circuit courts have adopted divergent approaches to the question, in some cases deferring to state laws entirely and in others applying a variety of multi-prong tests. The types of aspects typically taken into account in determining whether a debt transaction is more akin to equity include the following, among others:

• the names given to instruments used to document the transaction;
• whether there is a final maturity date for repayment;
• whether there is a specified interest rate with periodic interest payment dates; 
• whether collateral security is provided;
• whether the debt is subordinated to other indebtedness of the Company;
• whether the Company is sufficiently capitalized;
• whether the Company would have been able to obtain financing from unaffiliated lenders; 
• whether the investor has (and exercises) typical creditor remedies; and
• whether the proceeds were used to purchase capital assets.

Governance Rights

Generally, there is no dilution of ownership in this kind of financing and lenders do not require a board seat, except to the extent of equity acquired by Investor as a result of conversion permitted by the relevant debt documents or the exercise of warrants received as part of compensation. 

Equity participation

Parties may agree that the outstanding principal amount of the loans (including interest paid in kind) is convertible into shares of the borrower according to a pre-agreed pricing methodology after a certain date or upon the occurrence of pre-agreed triggers.

Alternatively, the Company may be required to issue warrants upfront as part of its compensation to the Investor. Warrants give the holder the right to acquire stock from the Company at a specified date and a specified price. In either case the parties may agree on specific methodologies for the calculation of the quantity or price of the shares to be acquired upon exercise.

Convertible debt and warrants are similar in that they allow the Investor to obtain equity upside if the business thrives. However, warrants can be detached from the debt and do not require an exchange of the debt for shares (i.e. the Investor may exercise the warrant and keep the debt, or sell the warrant to a third party and keep the debt). 

Investor Qualification Requirements

There are no specific qualification requirements generally applicable to investors in revenue-linked indebtedness; however, note that certain types of transactions may be subject to such requirements and other regulations, in particular the issuance securities, which is subject to strict federal and state securities laws.

Currency Considerations

There are no specific currency considerations generally applicable in connection with revenue-linked indebtedness, except (1) from a credit risk perspective, in connection with any mismatches between the currencies of the Company’s revenues and expenses, or (2) in cross-border transactions, where it is important to determine that the foreign-based borrower will have the ability to acquire U.S. dollars and remit them abroad to repay the debt, or that a judgment for collection will be enforceable for the full amount of the debt in the currency in which it was originally denominated.

Collateral

To be negotiated among the parties.

In the case of financings that are made available on the basis of contracted cash flows, it would be typical for the Investor to require a collateral assignment of the revenue contract. Although the underlying contract may include restrictions to assignment, such as making it subject to counterparty consent, the Uniform Commercial Code, which governs most security interests on personal property, includes provisions that ensure the ability to assign rights to payments in spite of such restrictions in most cases.

In transactions where Investor control of cash allocations is critical, debt documents may include security interests on bank accounts and a contractual framework to govern cash management. It is also not unusual for corporate loans to be secured by liens on the shares in the Company and a blanket security interest by the Company on most of its assets.  

Depending on the borrower’s credit, it would not be uncommon for debt to be secured by a lien on all of the assets of the borrower and/or the shares in the borrower.

Priority Payment Rights

Debt holders take priority over equity holders in bankruptcy. As to other creditors, the Investor will have priority to the extent of any collateral security granted to it, but otherwise generally will rank at the same level as other debt holders, except holders of subordinated debt. 

Note that certain types of credits may take priority over unsecured debt holders in general, such as certain claims for wages and work-related benefits, certain tax claims and claims in respect of services, goods or indebtedness provided after the bankruptcy filing. 

Legal limitations to pricing or total return

In some states, predatory financing practices could lead to claims under state unfair and deceptive acts and practices, usury, predatory lending, fraud, good faith and fair dealing laws. 

Usury laws will typically impose limitations to the interest rate that can accrue on certain types of debt, depending on factors such as whether the interest rate is agreed in writing and whether the borrower is an individual or a business. Usury laws vary by state. In New York, usury laws’ limitations to interest rates only apply to loans under $2.5 million; for transactions below that amount, charging interest above 25% per annum may constitute a crime, and interest charged from individuals for debt below $250,000 cannot exceed 16%.

In some jurisdictions, specific regulations have been enacted that require or will require specific disclosures, and in some cases specific registrations, from revenue-based and other commercial financing providers.

Limitation of Liability

Investors’ liability towards the Company will generally be limited to the amount of their loan commitment.  

Transfer Restrictions

There are no standard or mandatory transfer restrictions, although the parties can agree otherwise. Debt securities might be subject to transfer restrictions under federal securities laws.

Comparison to Revenue Sales and Equity Investments

The term “revenue-based financing” is typically used interchangeably to describe different types of financing structures. In some contexts, this term is used specifically to refer to revenue sale transactions, instead of loan financings. In revenue sale transactions, the investor is taking the business risk – it only gets paid if and when the revenues are generated. If the issuer fails and never receives any revenues, the investor never receives a return, approximating it to an equity investment.

Similar transactions may also be structured as a preferred equity investment, where the preferred investor has a preference vis a vis the other shareholders for the receipt of distributions. The amount of the preferred distributions may be determined as a percentage of gross-revenues, and be payable to the preferred shareholders before other shareholders receive any distributions.

Preferred investments may be redeemable or not. Redeemable preferred shares may be redeemable by the issuer or at the option of the investor, upon agreed conditions. Parties may also agree that preferred distributions will be made in the form of share redemptions instead of dividends, such that the investors’ equity position is reduced over time.

In the case of preferred equity investments, as a general rule dividend distributions will be limited by the issuer’s retained earnings – rules vary depending on the jurisdiction of the issuer, but typically companies cannot make dividend distributions in excess of retained earnings outside of extraordinary situations. This might mean that, even if the issuer earned revenues, it may not have cash available for distribution (or which is legally permissible to distribute) – in these cases, parties will typically agree that the distribution is made in kind (i.e. by issuing new shares to the investor) or that the dividends will accumulate and be paid when cash flows permit, or at liquidation or upon redemption.

Non-equity transactions, such as debt financing, are not subject to this retained earnings-related limitation. Additionally, debt transaction have a maturity date by which the loan has to be repaid in full, with the amount of revenues received potentially resulting in faster repayment via de cash sweep. In revenue sale and equity structures, there is typically no maturity date or schedule of payments.

Equity holders also take a backseat to other creditors in a liquidation scenario, and are only paid after debt claims are paid in full.

This resource is offered for information purposes only. It is not legal advice. Readers are urged to seek advice from qualified legal counsel in relation to their specific circumstances. We intend the resource’s contents to be correct and up to date at the time of publication, but we do not guarantee their accuracy or completeness, particularly as circumstances may change after publication. Toniic, the assisting pro bono law firms and the Thomson Reuters Foundation, accept no liability or responsibility for actions taken or not taken or any losses arising from reliance on this resource or any inaccuracies herein.

Revenue Sharing Agreement

Investment Structure Summary

In general, revenue sharing agreements be structured in a variety of methods under Singapore law by utilising elements of equity and/or debt. We have prepared the following summary based on two predominant methods of revenue sharing observed in the market:

• an equity-like structure where the investor subscribe for securities in the company that is the subject of the investment (the “Company”), in return for which they typically receive a regular share of the Company’s post-tax profits through dividend payments; and 
• a debt-like structure where the investor advances a principal sum to the Company as a loan, and the Company then makes regular repayments to the investors until a predetermined amount has been paid (e.g., 3-5x of the original principal amount advanced by investor(s)).
•  

In each case, the agreement would be entered into between the Company, the investor(s) and, if necessary, a guarantor and an agent. 

The precise content of the agreement (and therefore the revenue sharing arrangements) is to be agreed between the parties. To illustrate, the agreement may provide that the investor will provide an amount to the Company in connection with the entry into the agreement and the Company will make periodic payments to the investors in accordance with an agreed revenue sharing percentage, schedule and/or until a fixed due date. 

The guarantor will guarantee to the investors the performance of the Company’s obligations under the agreement. The guarantor may be particularly relevant if there is any question in respect of the Company’s creditworthiness.

The agent will facilitate the revenue sharing arrangement (e.g. administering payments) and may be particularly relevant where there is a large number of investors or there is a need for investors to be able to trade (i.e. transfer) their interest in the revenue sharing agreement. 

Category

Equity and debt

Category for tax purposes

Singapore has no capital gains tax, thus taking out cash as a contractual contingency (versus equity) generally does not provide any obvious tax efficiencies.

Otherwise, the precise content of the agreement can be agreed between the parties, and the specific tax arrangements will depend on the precise outcome.

Governance Rights

If the investor own equity in the Company, the parties can agree to include governance rights for the investor to participate in or influence the management of the Company, including any observation or consultation rights, voting rights, veto/approval rights in respect of particular matters, whether from equity or contractual rights and whether or not contingent upon the occurrence of specified events (e.g. springing right to vote in case of underperformance). 

If the investor has only advanced a loan without any equity component, it typically does not receive any governance rights in the Company in the absence of an event of default under a secured loan which triggers a receivership procedure. 

Investor Qualification Requirements

None, but in some cases, investors might require a license to advance a loan under the Moneylenders Act 2008.

Currency Considerations

The investment (and related payment obligations) may be denominated in any currency.

There are no material restrictions or conditions for the remittance of investment proceeds outside of Singapore. 

Collateral

The parties can agree whether the agreement should include any collateral and/or guarantees. Among other things, the need for collateral and/or guarantees might rest on the creditworthiness and financial standing of the Company as well as the precise extent and duration of the revenue sharing arrangements.

Priority Payment Rights

The parties can agree whether the agreement should include a preferential right for the investor to receive distributions based on an agreed portion of (1) gross revenues, (2) free cash flow and/or (3) net income. 

Similar agreements would normally include late payment penalty and interest provisions to incentivize the parties’ timely fulfilment of their respective payment obligations. 

The Company may negotiate for the benefit of early total payment provisions which may have the effect of releasing it from all or part of its revenue sharing obligations.

Distribution and Redemption Limitations

Distribution and Redemption Limitations: The general rule under the Companies Act 1967 is the dividends can only be paid out of profits (including capital appreciation).

Aside from the above, the parties can agree whether the agreement should provide that the making of dividend payments or other distributions by the Company to investor as agreed pursuant to the transaction would be subject to any mandatory conditions, from an accounting perspective or otherwise (e.g. timing or frequency limitations, retained earnings or gains requirements, obligations that have mandatory priority over distributions to investor, limitations on mandatory redemptions for equity instruments, etc.)

Legal limitations to pricing or total return

There are no general restrictions under Singapore law. 

For the avoidance of doubt, there are no usury laws in Singapore, but any provision that requires payment of an additional or default interest pay not be enforceable if the payment is deemed to amount to a penalty sum (e.g., if the default interest is set so high as to be disproportionate to the lenders’ loss). 

Status in Insolvency Proceedings

Subject to any agreed collateral and/or guarantees, the investors will be an unsecured creditor of the Company.

Limitation of Liability

This is subject to contract and the parties can agree the precise liability regime and any limits on liability in the agreement.

The parties should consider and specify whether investors’ liability towards the Company and its creditors is limited to its funded or committed investment. The parties may further indicate whether specific types of liability or actions may be exceptions to such limitation (e.g. labor/pension claims, environmental claims, fraud).

If there is an agent in the structure, the investors will likely be required to indemnify the agent from all losses arising out of or incurred in connection with any claim brought by a third party against the agent for wrongdoing other than the agent’s gross negligence or willful misconduct.

The Company will likely be required to indemnify the investors against any losses incurred by the investors as a result of event of defaults or failure by the Company to pay any amount under the agreement. 

Transfer Restrictions

The parties can agree whether the investment would be subject to any transfer restrictions (e.g. limitations to assignment or other dispositions, securities laws limitations, approval for admission of new members/shareholders, etc.)

Critical Tax Considerations:

As mentioned above, Singapore has no capital gains tax, thus taking out cash as a contractual contingency (versus equity) generally does not provide any obvious tax efficiencies.

Otherwise, the precise content of the agreement can be agreed between the parties, and the specific tax arrangements will depend on the precise outcome.