Objection, Your Honor!

At first glance, hearing a witness before the court seems fairly straightforward. Only a single, short provision applies here, under which the witness is to give testimony orally, first answering the questions from the presiding judge, and then from other judges and the parties.

 

The presiding judge is in charge of the hearing, disallowing questions that are biased or otherwise inappropriate. The parties and their representatives are also expected to monitor the course of the proceedings. However, in my experience, the attention span of courts, parties, and representatives as to what exactly is asked and answered during a hearing, can vary significantly.

 

  • If the court fails to react to a question that the other party deems inappropriate, in principle, the relevant representatives can only voice their reservations when it is the interested party’s time to proceed (unless given the floor by the court earlier) and clarify or further explore the testimony given, e.g. by asking follow-up questions.
  • A motion to disallow a question after the same has already been answered seems somewhat superfluous (given the fact that the testimony has already been given) – even if the court does rule in favour of the motion.
  • Entering a reservation to the minutes of the hearing once the testimony has been given or the question answered is also unlikely to substantially affect the course of the hearing (unless followed by additional questions) but may have a bearing on the court’s evaluation of the testimony when rendering the judgement.

 

These rules, albeit sound and reasonable, may sometimes negatively affect the course and ultimate result of a hearing. Most witnesses appear on the stand out of necessity, having been obliged by the court to do so, and are often overwhelmed by the formality and solemnity of the occasion.

 

Inappropriate questions, ones that are suggestive or attempt to directly refer to the witness’s earlier testimony in the same case by misquoting or distorting the witness’s statements in the wording of the question itself (which I have seen happen myself), may prompt the witness to react in various ways:

 

Did I say that? What did I say? Maybe I made a mistake? I did not say that, did I? Why would I say that?

 

This is only exacerbated if the court fails to react to inappropriate questions on an ongoing basis, and can have a direct, negative bearing on the subsequent course of the hearing, for instance, in terms of the witness’s engagement and willingness to testify.

 

What if reservations during the course of a hearing came in the form of a short note or objection immediately after an inappropriate question has been asked? Such a solution would facilitate verification of the validity and viability of the question – even before an answer is given.

 

This could potentially help us avoid:

 

  • asking inappropriate questions,
  • hearing insubstantial testimonies, or
  • correcting testimonies that have not, in fact, been given.

 

I must admit that in the course of my courtroom practice, I have at times been reminded that we are not in the USA when attempting to directly react to a blatantly inappropriate course of a hearing.

 

Naturally, the proposed procedure does run a significant risk of abuse, e.g. by preventing a testimony altogether through repeated objections. To be viable, such an arrangement would require considerable strengthening (materialization) of the courts prerogative to actively monitor the behaviour of the parties and their representatives, also by employing specific measures designed to prevent abuse of the procedural law.

ANTI-DILUTION CLAUSE

The inclusion of the anti-dilution clause in the investment agreement aims to safeguard the investor’s stake in the share capital at the same percentage ratio without blocking the admission of new investors to the company, thereby facilitating its continued growth.

 

What is the anti-dilution clause?

 

The purpose of the anti-dilution clause is to safeguard the investor’s interests against the depreciation of their shares in the company resulting from the issuance of new shares at a price lower than that at which the shares were acquired. The anti-dilution clause grants the investor the right to adjust the number of their shares or receive alternative compensation in order stake in the company’s share capital at the same percentage ratio. The objective of the anti-dilution clause is to protect the value of the investor’s investment and to ensure the same proportion of the stake in the company’s share capital when faced with potential dilution caused by subsequent investment rounds of the company.

 

What forms can it take?

 

Basically, there are two forms of anti-dilution clause application, i.e. full-ratchet and weighted average.

 

In a full-ratchet mechanism, the existing shareholder’s shares are recalculated at the new issuance price (e.g., if new shares are issued at half the price, the existing shareholder is entitled to twice the number of shares).

 

Similarly to the full-ratchet, the weighted-average mechanism also involves recalculating shares at the new issuance price, and additionally, the existing shareholder may acquire additional shares from the new issuance.

 

How to ensure compliance with the obligation arising from the anti-dilution clause?

 

Parties may stipulate in the investment agreement that a breach of the anti-dilution clause may be subject to paying damages or contractual penalties; hence, when included in the articles of association, the significance of this clause increases.

 

In summary, the implementation of the anti-dilution clause aims to safeguard the investor from incurring financial losses during subsequent investment rounds. This ensures that the investor is protected should a future investment round was at a price lower than that set at the time of the investor’s entry into the investment.

 

At Hoogells, we understand that drafting and negotiating an investment agreement is a complex process. We are here to offer you our knowhow and expertise.