When Promised Investment Capital Never Arrives: What Nigerian Founders Can Do

The term sheet was signed.

The investment documents were executed. The company planned around the agreed funding. Then the investor failed to advance the next tranche—or declined to complete the investment altogether.

Can the investor simply walk away?

The answer depends on the legal obligations it assumed.

START WITH THE TRANSACTION DOCUMENTS.

The first question is not whether the investor changed its mind.

The first question is:

What did the investor contractually undertake to do?

The answer will usually be found in the: - Term Sheet; - Share Subscription Agreement; - Shareholders' Agreement; - Investment Agreement; and - Articles of Association.

Commercial disputes are decided by the agreements the parties signed.

WAS THE FUNDING OBLIGATION LEGALLY BINDING?

Not every signed term sheet creates an enforceable obligation to invest.

Many term sheets are expressly stated to be non-binding, except for provisions such as confidentiality, exclusivity and governing law.

Where a binding investment agreement has been executed, however, an investor who fails to perform may be exposed to contractual liability.

WERE THERE CONDITIONS PRECEDENT?

Investment obligations are frequently conditional.

Examples include: - satisfactory due diligence; - regulatory approvals; - board approvals; - corporate restructuring; - execution of closing documents; or - achievement of agreed milestones.

If those conditions were never satisfied or were validly waived the legal consequences may differ significantly.

WHAT REMEDIES MAY BE AVAILABLE?

Depending on the transaction documents and the circumstances, a company may be entitled to pursue:

• damages for breach of contract;
• specific performance, where appropriate;
• contractual termination rights;
• enforcement of default provisions;
• buy-back or compulsory transfer mechanisms; and
• arbitration or litigation, where provided for in the dispute resolution clause.

The appropriate remedy depends on the contractual framework.

SILENCE DOES NOT ALWAYS AMOUNT TO BREACH.

A delayed response, missed meeting or prolonged silence does not, without more, establish legal liability.

The critical question is whether the investor has failed to perform a legally binding obligation imposed by the investment documents.

Commercial frustration is not always a legal breach.

BEFORE COMMENCING PROCEEDINGS

Founders should first:

• review every executed transaction document;
• identify the specific contractual obligation allegedly breached;
• issue a formal notice where required;
• preserve all correspondence and communications; and
• comply with any contractual dispute resolution procedure.

Strong claims begin with strong documentation.

THE BEST PROTECTION IS BUILT INTO THE DEAL.

Well-drafted investment documents should clearly address:

• funding timelines;
• conditions precedent;
• default provisions;
• milestone-based funding;
• termination rights;
• dispute resolution; and
• the consequences of a failure to fund.

The strongest legal remedy is often one negotiated before the investment closes.

VENTURE CAPITAL IS BUILT ON CONTRACTS.

When funding commitments are not honoured, the answer is rarely found in assumptions or commercial expectations.

It is found in the agreements the parties executed—and the legal rights those agreements create.