Decoding Legal Latin and Its Implications in the Founders Agreement
The Use of "Mutatis Mutandis"
It isn't unusual for legal documents to sport a bit of Latin, prompting raised eyebrows among those not in the legal profession. The Founders Agreement is no exception, incorporating the term "mutatis mutandis." This phrase appears in Section 1.5, setting a precedent for applying the agreement's principles across the board.
What Does Section 1.5 Say?
In essence, Section 1.5 dictates that the corporate governance principles outlined in the Founders Agreement, along with the Articles of Association, shall extend "mutatis mutandis" — meaning with the necessary adjustments — to all associated group companies. This could include any parent companies, subsidiaries, or sister companies established by the founders. The aim is to ensure consistency in governance across entities, particularly useful when expanding or integrating with foreign investors interested in creating entities in new jurisdictions.
The Importance for International Expansion
This clause is paramount for founders looking to attract foreign investment, enabling new entities in different locales to operate under the same governance framework without drafting a new agreement for each entity. It safeguards the governance structure during early funding stages and as the company's structure evolves.
Local Funding and Corporate Structure
Notably, for Estonian startups, initial seed funding often comes from local sources, capitalizing on the country's robust investment scene. As these startups grow and begin eyeing international expansion, establishing foreign entities becomes a strategic step — typically after the Founders Agreement transitions into a shareholders agreement influenced by first-round investors.
Beyond Section 1.5: Section 2.5.4
Section 2.5.4 reiterates the "mutatis mutandis" principle, specifically applying the obligations of Section 7, which covers Non-Compete and Non-Solicitation, to any legal entities founders might use to hold shares (Founder HoldCos). Essentially, this means that not only the founders but also their holding companies are bound by the non-compete and non-solicitation terms of the agreement, ensuring these entities comply with the agreement's stipulations.
Summary
The term "mutatis mutandis" plays a crucial role in the Founders Agreement, ensuring that its principles of corporate governance uniformly apply to any related business ventures or entities the founders might establish. This coherence is invaluable for maintaining governance standards, facilitating international expansion, and ensuring that both founders and their holding entities adhere to the foundational agreements of their business.
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