MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
FROM: Leonard Ashford, Of Counsel Emerging Companies & Venture Capital Practice Group Calderwood & Harkness LLP 600 Lexington Avenue New York, NY 10022
TO: Arjun Mehta, Chief Executive Officer & Co-Founder David Lindstrom, Chief Financial Officer Priya Ramanathan, General Counsel Skybridge Fintech Ltd. 1400 Market Street, Suite 2200 Wilmington, DE 19801
CC: Victoria Chambers, Partner (Responsible Partner), Calderwood & Harkness LLP Nina Reyes, Senior Associate, Emerging Companies & Venture Capital, Calderwood & Harkness LLP
DATE: November 14, 2023
RE: Delaware General Corporation Law Considerations for Proposed $60,000,000 Convertible Promissory Note Issuance by Skybridge Fintech Ltd.
MATTER NO.: 1009-00001
I. EXECUTIVE SUMMARY
You have asked us to analyze the principal requirements and considerations under the Delaware General Corporation Law (Title 8 of the Delaware Code, as amended, the "DGCL") governing the proposed issuance by Skybridge Fintech Ltd. ("Skybridge" or the "Company"), a Delaware corporation organized as a C-corporation, of convertible promissory notes (the "Notes") in the aggregate principal amount of Sixty Million Dollars ($60,000,000) to a syndicate of investors (collectively, the "Purchasers") led by Ridgeline Ventures Fund IV, L.P. ("Ridgeline IV"). This memorandum sets forth our preliminary analysis and recommendations. It does not address federal or state securities law matters in detail; those issues are the subject of a forthcoming companion memorandum.
Our key conclusions are as follows:
Board Authority. The Board of Directors of the Company (the "Board") has the authority under DGCL §§ 122(13), 152, 153, and 157 to authorize the issuance of the convertible Notes and the shares of the Company's capital stock issuable upon conversion thereof (the "Conversion Shares") without obtaining stockholder approval, provided that the Company has a sufficient number of authorized but unissued shares of capital stock available to cover the maximum number of Conversion Shares issuable upon conversion of the Notes (including accrued and unpaid interest).
Authorized Share Sufficiency. A careful review of the Company's Amended and Restated Certificate of Incorporation (the "Charter") is required to confirm that there are sufficient authorized but unissued and unreserved shares of capital stock to accommodate the full conversion of the $60,000,000 in aggregate principal amount of Notes, together with all accrued and unpaid interest thereon at a rate of 6.00% per annum over the full twenty-four (24) month term. Based on preliminary calculations set forth in this memorandum, full conversion at the valuation cap-implied price would require approximately 4,347,000 shares. If the authorized share pool is insufficient, a charter amendment under DGCL § 242 — which requires stockholder approval — will be necessary prior to the closing of the offering.
Contractual Consent Requirements. Notwithstanding the absence of a statutory requirement under the DGCL for stockholder approval of the note issuance itself, the Company is party to an Amended and Restated Investors' Rights Agreement, a Right of First Refusal and Co-Sale Agreement, and a Voting Agreement, each of which may contain protective provisions, consent requirements, or participation rights that are triggered by the incurrence of new indebtedness or the issuance of new securities. These contractual consent requirements must be analyzed separately and comprehensively. A detailed memorandum addressing those contractual matters is forthcoming on or about December 1, 2023.
Recommended Approach. We recommend that the Company obtain both (a) formal Board authorization by means of a Unanimous Written Consent of the Board of Directors in lieu of a meeting pursuant to DGCL § 141(f), and (b) a Written Consent of Stockholders in lieu of a special meeting pursuant to DGCL § 228, as a matter of both best practice and prudent compliance with the contractual obligations likely contained in the Company's existing governance and investor agreements.
The balance of this memorandum addresses these matters in detail.
II. BACKGROUND AND TRANSACTION OVERVIEW
A. The Company
Skybridge Fintech Ltd. is a corporation organized under the laws of the State of Delaware, having been originally incorporated on or about March 22, 2017. The Company's Delaware file number is 6384291, and its federal Employer Identification Number is 83-2147605. The Company's principal executive offices are located at 1400 Market Street, Suite 2200, Wilmington, Delaware 19801.
Skybridge operates a cloud-based payments orchestration and embedded lending platform that serves mid-market e-commerce companies. The Company's technology platform enables its customers to integrate multiple payment gateways, optimize transaction routing, and offer embedded financing products to their end users. As of the third quarter of 2023, the Company has achieved approximately $78 million in annualized recurring revenue ("ARR") and processes approximately $4.2 billion in annualized gross payment volume ("GPV"). The Company currently employs approximately 310 full-time equivalent employees across its engineering, product, sales, and general and administrative functions.
B. Capitalization History
The Company has raised multiple rounds of institutional venture capital financing since its incorporation. The relevant history is summarized below:
• Series A Preferred Stock Financing. The Company's Series A round of preferred stock financing was led by Crestpoint Seed Partners, L.P. ("Crestpoint"). The precise closing date and aggregate amount are reflected in the Company's records and the governing stock purchase agreement.
• Series B Preferred Stock Financing. The Company's Series B round of preferred stock financing was led by Halcyon Growth Equity, L.P. ("Halcyon"). Again, the specific terms are reflected in the applicable stock purchase agreement.
• Series C Preferred Stock Financing. The Company's Series C round of preferred stock financing was co-led by Ridgeline Ventures Fund III, L.P. ("Ridgeline III") and Beacon Hill Capital Partners, LLC ("Beacon Hill"). The Series C financing closed in July 2021 at a post-money valuation of $620,000,000. This round established the current preferred stock capital structure of the Company and introduced certain governance and protective provisions that remain in effect.
As of the date of this memorandum, the Company has approximately 48,500,000 shares of capital stock outstanding on a fully diluted basis (the "Fully Diluted Share Count"), inclusive of all issued and outstanding shares of common stock, all issued and outstanding shares of preferred stock (on an as-converted to common stock basis), all shares issuable upon exercise of outstanding stock options under the Company's equity incentive plan, and all shares issuable upon exercise of outstanding warrants, if any.
The most recent independent valuation of the Company's common stock was performed by Atlas Valuation Services, Inc. and is reflected in a 409A valuation report dated September 15, 2023. That report established a fair market value ("FMV") of $8.42 per share of the Company's common stock as of the applicable valuation date. This 409A valuation is relevant to the Company's stock option pricing and, as described below, provides a reference point for evaluating the economics of the proposed convertible note issuance.
C. Existing Indebtedness
The Company is currently a borrower under a $15,000,000 venture debt facility (the "Kelvantis Facility") with Kelvantis Lending Corp. ("Kelvantis"), pursuant to a Loan and Security Agreement dated as of August 15, 2022 (the "Kelvantis LSA"). The Kelvantis Facility matures on August 15, 2025. The Kelvantis LSA contains customary affirmative and negative covenants, including, among others, a covenant restricting the Company's ability to incur additional indebtedness without Kelvantis's prior written consent. As discussed in Section VII below, the Company will need to obtain Kelvantis's consent and waiver prior to the issuance of the convertible Notes. The Kelvantis LSA and the related lender consent requirements are the subject of a separate detailed memorandum that we are preparing with an anticipated date of November 28, 2023.
D. Proposed Transaction
The Company proposes to issue convertible promissory notes in the aggregate principal amount of $60,000,000 (the "Notes") to a syndicate of four institutional investors. The material terms of the proposed issuance, as reflected in the current term sheet circulated to the Purchasers, are summarized below:
Aggregate Principal Amount. $60,000,000, to be funded at closing in a single tranche.
Interest Rate. 6.00% per annum (600 basis points), calculated on the basis of simple interest using a 365-day year. At the full $60,000,000 principal amount, annual interest accrual is $3,600,000, or approximately $300,000 per month.
Maturity Date. Twenty-four (24) months from the date of closing. Based on the anticipated closing date, the maturity date is expected to fall on or about January 15, 2026.
Conversion Mechanics. The Notes will be convertible into shares of the Company's preferred stock (or such other class and series of equity securities issued in the Qualified Financing, as defined below) at a conversion price per share equal to the lower of:
(a) 80% of the price per share paid by the investors in a Qualified Financing (i.e., a 20% conversion discount to the Series D price per share); or
(b) the price per share implied by the Valuation Cap (as defined below).
Qualified Financing. A "Qualified Financing" is defined as the next round of equity financing in which the Company raises at least $80,000,000 in new equity capital, which is anticipated to be the Company's Series D preferred stock financing.
Valuation Cap. $750,000,000 pre-money valuation. Based on the current Fully Diluted Share Count of approximately 48,500,000 shares, the cap-implied conversion price per share is approximately $15.46 (calculated as $750,000,000 ÷ 48,500,000 = $15.4639, rounded).
Conversion Price. The conversion price per share shall be the lower of clause (a) and clause (b) above. This structure ensures that the Noteholders receive the more favorable conversion rate. The Valuation Cap effectively establishes a ceiling on the per-share price (and thus a floor on the number of shares issuable upon conversion), while the 20% discount provides a benefit relative to Series D investors in the event the Series D pricing implies a per-share price below the cap-implied price.
Automatic Conversion. The Notes will convert automatically upon the closing of a Qualified Financing, without the need for any further action by the Noteholders.
Optional Conversion at Maturity. If no Qualified Financing has occurred prior to the Maturity Date, each Noteholder will have the option to either (i) convert the outstanding principal and accrued interest on its Note into shares of the Company's capital stock at the Valuation Cap price per share, or (ii) demand repayment of all outstanding principal and accrued interest in cash.
Change of Control Premium. Upon a Change of Control event (as to be defined in the Note Purchase Agreement), each Noteholder will be entitled to receive the greater of (i) 2.0x the outstanding principal amount of its Note plus all accrued and unpaid interest thereon, or (ii) the value that such Noteholder would receive if the Note were converted at the Valuation Cap price immediately prior to the Change of Control.
Most Favored Nation Provision. If the Company issues any subsequent convertible promissory notes or Simple Agreements for Future Equity (SAFEs) on terms more favorable to the subsequent purchasers, each Noteholder in this offering will have the right to amend the terms of its Note to match the more favorable terms (the "MFN Provision").
Subordination. The Notes will be expressly subordinated in right of payment to the Company's existing obligations under the Kelvantis Facility, as documented in a Subordination Agreement to be executed concurrently with the closing.
Purchaser Syndicate. The Purchasers and their respective commitment amounts are as follows:
We note that three of the four Purchasers — Ridgeline (through its affiliate Ridgeline III), Beacon Hill, and Halcyon — are existing preferred stockholders of the Company, having participated in prior financing rounds. This overlap between existing investors and proposed Purchasers is significant for purposes of both the fiduciary duty analysis (Section VI below) and the contractual consent analysis (Section V.B below).
III. BOARD AUTHORIZATION UNDER THE DGCL
This Section III addresses the statutory authority of the Board to authorize the issuance of the Notes and the Conversion Shares without obtaining stockholder approval. As set forth below, the DGCL vests the Board with broad authority to approve the proposed transaction.
A. Authority to Issue Debt Instruments — DGCL § 122(13)
Section 122 of the DGCL enumerates the general powers of every Delaware corporation. Subsection (13) provides, in relevant part, that every corporation incorporated under the DGCL has the power to:
"[M]ake contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any part of its property, franchises and income . . . ."
8 Del. C. § 122(13).
The convertible Notes are debt obligations of the Company within the plain meaning of Section 122(13). The power to issue notes and other obligations is a fundamental corporate power that may be exercised by the Board in the ordinary course of its management authority under DGCL § 141(a), which provides that the "business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors." There is no specific statutory requirement under the DGCL for stockholder approval of the issuance of debt instruments, whether convertible or non-convertible. Accordingly, Board authorization alone is legally sufficient to approve the issuance of the Notes as a matter of Delaware statutory law.
We note that while the DGCL does not impose a stockholder approval requirement for debt issuances, the Company's Charter, Bylaws, or investor agreements may impose additional requirements. Those contractual and charter-based requirements are addressed in Section V below.
B. Authority to Issue Shares Upon Conversion — DGCL §§ 152 and 153
The convertible Notes contain embedded conversion rights that, upon exercise (whether automatically upon a Qualified Financing or optionally at maturity), will result in the issuance of shares of the Company's capital stock. The Board's authority to issue such shares is governed by DGCL §§ 152 and 153.
1. DGCL § 152 — Issuance of Stock; Lawful Consideration. Section 152 of the DGCL addresses the issuance of stock and the nature of permissible consideration. Section 152 provides, in pertinent part:
"The consideration, as determined pursuant to § 153(a) and (b) of this title, for subscriptions to, or the purchase of, the capital stock to be issued by a corporation shall be paid in such form and in such manner as the board of directors shall determine. . . . In the absence of actual fraud in the transaction, the judgment of the directors as to the value of such consideration shall be conclusive."
8 Del. C. § 152.
Upon conversion of the Notes, shares of the Company's capital stock will be issued to the Noteholders. The consideration for such shares will consist of the cancellation and satisfaction of the Company's outstanding indebtedness under the Notes, including all outstanding principal and accrued and unpaid interest. The cancellation of indebtedness constitutes valid consideration for the issuance of shares under Section 152. Delaware courts have consistently held that the conversion of debt into equity — whereby the Company's obligation to repay the debt is extinguished in exchange for the issuance of shares — satisfies the consideration requirements of the DGCL. See, e.g., Lofland v. Cahall, 118 A. 1, 4 (Del. 1922) (recognizing cancellation of indebtedness as valid consideration for stock issuance).
We recommend that the Board resolution expressly specify the terms and conditions of conversion and identify the consideration to be received by the Company upon conversion (i.e., the cancellation of outstanding principal and accrued interest under the Notes), thereby establishing a clear record for purposes of Section 152.
2. DGCL § 153 — Consideration for Stock. Section 153 of the DGCL grants the Board discretion to fix the consideration for shares to be issued by the Company. Section 153(a) provides:
"Shares of stock with par value may be issued for such consideration, having a value not less than the par value thereof, as determined from time to time by the board of directors, or by the stockholders if the certificate of incorporation so provides."
8 Del. C. § 153(a).
In the context of the proposed convertible note issuance, Section 153 is relevant in two respects. First, the Board has the authority to fix the conversion price mechanics for the shares issuable upon conversion, including the alternative conversion price formulation (the lower of 80% of the Series D price per share or the cap-implied price of approximately $15.46 per share). The Board resolution should specify these conversion price mechanics with precision.
Second, Section 153(a) imposes a par value constraint: shares with par value may not be issued for consideration having a value less than the par value thereof. We expect that the Company's Charter sets the par value of its common stock (and each series of preferred stock) at $0.0001 per share, or a similar nominal amount, which is standard for Delaware venture-backed companies. Because the anticipated conversion prices (whether at the cap-implied price of approximately $15.46 per share or at the 20% discount to the Series D price) are orders of magnitude greater than the expected par value, the par value constraint is not expected to present any impediment. Nevertheless, we recommend confirming the par value set forth in the Charter as part of our review.
C. Authority to Create Conversion Rights — DGCL § 157
The conversion features embedded in the Notes — including the right of automatic conversion upon a Qualified Financing and the right of optional conversion at maturity — constitute "rights" or "options" to acquire shares of the Company's capital stock within the meaning of DGCL § 157. Section 157(a) provides:
"Subject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to acquire from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors."
8 Del. C. § 157(a).
Section 157(b) further provides that the terms upon which, the time or times at or within which, and the consideration for which any such shares may be acquired from the corporation upon the exercise of any such right or option shall be fixed by the board of directors. The Board's authority under Section 157 is broad and encompasses the types of conversion rights contemplated by the proposed Notes, including:
(i) automatic conversion upon the occurrence of a specified triggering event (a Qualified Financing);
(ii) optional conversion at the election of the Noteholder upon the maturity date;
(iii) conversion at a price per share determined by a formula (the lower of the discounted Series D price and the cap-implied price); and
(iv) conversion of both principal and accrued interest into shares.
We recommend that the Board resolution expressly authorize the creation of the conversion rights pursuant to Section 157 and specify the material terms thereof, including the triggering events, the conversion price formula, and the class and series of shares issuable upon conversion.
D. Form of Board Action
Under DGCL § 141(f), the Board may act without a meeting if all members of the Board entitled to vote consent in writing (or by electronic transmission) to the action taken. Section 141(f) provides, in relevant part:
"Unless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the board of directors . . . may be taken without a meeting if all members of the board . . . consent thereto in writing, or by electronic transmission . . . ."
8 Del. C. § 141(f).
We recommend that the Board authorize the proposed transaction by means of a Unanimous Written Consent of the Board of Directors in lieu of a meeting (the "Board Consent"). This approach is standard for transactions of this nature and avoids the logistical complexities associated with scheduling and convening a formal board meeting, particularly given the involvement of multiple time zones and the desirability of moving expeditiously toward closing.
The Board Consent should authorize the following actions:
(a) The issuance of convertible promissory notes in the aggregate principal amount of up to $60,000,000, on the terms and conditions substantially as described in the term sheet and to be set forth in the Note Purchase Agreement.
(b) The material terms of the Notes, including the interest rate (6.00% per annum), the maturity date (24 months from closing), the conversion mechanics (automatic conversion upon a Qualified Financing at the lower of 80% of the Series D price or the cap-implied price, and optional conversion at maturity at the cap-implied price), the Change of Control premium, the MFN Provision, and the subordination of the Notes to the Kelvantis Facility.
(c) The reservation of a sufficient number of authorized but unissued shares of the Company's capital stock for issuance upon conversion of the Notes, including shares issuable in respect of accrued and unpaid interest.
(d) The execution and delivery by the Company of the Note Purchase Agreement and all related transaction documents, including without limitation the form of Convertible Promissory Note, the Subordination Agreement among the Company, the Noteholders, and Kelvantis, any amendments to the Amended and Restated Investors' Rights Agreement and the Right of First Refusal and Co-Sale Agreement necessary to add the Purchasers as parties thereto, and any Escrow Agreement, if applicable.
(e) The authorization of the Company's officers, specifically the Chief Executive Officer and the Chief Financial Officer, to negotiate, execute, and deliver all transaction documents, to make all filings required in connection with the offering (including the Form D filing under Regulation D and any required state blue sky filings), and to take all actions necessary or desirable to consummate the transaction.
We will prepare a draft of the Board Consent for the Company's review promptly upon receiving the Company's confirmation to proceed with the transaction on the terms described herein.
IV. SUFFICIENCY OF AUTHORIZED BUT UNISSUED SHARES
A. Authorized Share Analysis
A critical prerequisite to the issuance of the Notes (and the associated conversion rights) is confirmation that the Company has a sufficient number of authorized but unissued and unreserved shares of capital stock to cover the maximum number of Conversion Shares that may be issued upon conversion. This analysis requires a review of the following:
(i) Total authorized shares. The total number of shares of each class and series of capital stock that the Company is authorized to issue, as set forth in the Charter.
(ii) Shares issued and outstanding. The total number of shares of each class and series currently issued and outstanding, including shares of common stock and all series of preferred stock (Series A, Series B, and Series C).
(iii) Shares reserved for issuance. The total number of shares reserved for issuance under existing commitments, including shares reserved for issuance upon (a) exercise of outstanding stock options under the Company's equity incentive plan(s), (b) exercise of any outstanding warrants, (c) conversion of outstanding preferred stock, and (d) any other contractual commitments to issue shares.
(iv) Available share pool. The number of authorized but unissued and unreserved shares remaining after subtracting clauses (ii) and (iii) from clause (i).
We have not yet received the Company's current Charter or a detailed capitalization table showing the breakout of authorized, issued, reserved, and available shares. Obtaining these documents is essential to completing this analysis and is the first priority action item identified in Section IX below.
B. Maximum Share Issuance Calculation
To determine the number of shares that must be available for issuance upon conversion, we must calculate the maximum number of Conversion Shares under the most dilutive conversion scenario.
Conversion of Principal. At the Valuation Cap-implied conversion price of approximately $15.46 per share, full conversion of the $60,000,000 in aggregate principal amount would require the issuance of approximately 3,881,000 shares, calculated as follows:
$60,000,000 ÷ $15.46 per share ≈ 3,881,000 shares (rounded to the nearest thousand)
Conversion of Accrued Interest. The Notes bear interest at 6.00% per annum. Over the full twenty-four (24) month term to maturity, total accrued and unpaid interest on the full $60,000,000 principal amount would be approximately $7,200,000, calculated as follows:
$60,000,000 × 6.00% × 2 years = $7,200,000
At the cap-implied conversion price of approximately $15.46 per share, conversion of the maximum accrued interest would require the issuance of approximately 466,000 additional shares:
$7,200,000 ÷ $15.46 per share ≈ 466,000 shares (rounded to the nearest thousand)
Total Maximum Conversion Shares. Combining the principal and interest conversion, the total maximum number of Conversion Shares is approximately 4,347,000 shares, calculated as follows:
3,881,000 shares (principal) + 466,000 shares (interest) ≈ 4,347,000 shares
Important Qualification. The 4,347,000-share figure represents the maximum number of shares issuable upon conversion at the cap-implied price. This figure constitutes the ceiling on share issuance because the Valuation Cap establishes a floor on the per-share conversion price. If conversion occurs in connection with a Qualified Financing at which the 20% discount to the Series D price per share yields a conversion price higher than the cap-implied price, fewer shares would be issued. Conversely, the cap-implied price represents the lowest possible conversion price under the terms of the Notes, and thus the maximum share issuance scenario is the one calculated above.
For prudent corporate planning purposes, the Company should reserve at least 4,347,000 shares (or a slightly higher number to provide a buffer for rounding and minor adjustments) against the potential conversion of the Notes.
C. Need for Charter Amendment
If the Company's available share pool (authorized but unissued and unreserved shares) is less than the approximately 4,347,000 Conversion Shares required, the Company would need to amend its Charter to increase the number of authorized shares of the applicable class prior to the issuance of the Notes. Under DGCL § 242:
(a) The Board must adopt a resolution setting forth the proposed amendment, declare its advisability, and either call a special meeting of stockholders to consider the amendment or direct that the amendment be submitted for consideration at the next annual meeting. Alternatively, the Board may submit the amendment for approval by written consent of stockholders pursuant to DGCL § 228.
(b) Stockholder approval requires the affirmative vote (or written consent) of a majority of the outstanding shares of each class entitled to vote thereon, unless the Charter requires a greater vote.
8 Del. C. § 242(b).
Based on the Company's current Fully Diluted Share Count of approximately 48,500,000 shares, and assuming a reasonably sized authorized share pool was established in connection with the Series C financing in 2021, our preliminary expectation is that the Company should have sufficient headroom to accommodate the approximately 4,347,000 additional Conversion Shares. Venture-backed Delaware corporations typically authorize a number of shares significantly in excess of the number issued, reserved, and anticipated to be needed for near-term issuances, with the authorized pool typically providing 15-25% or more of cushion above fully diluted shares outstanding. However, this expectation must be confirmed against the actual numbers in the Charter and the Company's current capitalization records.
Recommendation. As a priority matter, we request that the Company provide us with (a) the current Amended and Restated Certificate of Incorporation (including all certificates of amendment and certificates of designation), and (b) a current, fully detailed capitalization table showing all authorized, issued, outstanding, and reserved shares by class and series, including the option pool and any outstanding warrants. Upon receipt of these documents, we will prepare a definitive share sufficiency analysis and advise whether a charter amendment is required.
V. STOCKHOLDER APPROVAL REQUIREMENTS
A. No Statutory Stockholder Approval Required for Note Issuance
As discussed in Sections III.A through III.C above, the DGCL does not require stockholder approval for the issuance of convertible debt instruments or for the reservation of shares for issuance upon conversion thereof. The Board has full statutory authority to approve these actions, subject only to the authorized share sufficiency requirement.
To summarize the applicable DGCL provisions:
• Debt issuance. DGCL § 122(13) vests the Board with the power to issue notes and other obligations without stockholder action.
• Share issuance upon conversion. DGCL §§ 152 and 153 authorize the Board to issue shares for the consideration it determines, including the cancellation of indebtedness upon conversion.
• Conversion rights. DGCL § 157 authorizes the Board to create rights and options to acquire shares, including conversion rights embedded in debt instruments.
• Share reservation. The reservation of authorized but unissued shares for future issuance upon conversion does not require stockholder approval, as it does not involve the actual issuance of shares.
The one circumstance in which stockholder approval would be statutorily required is if the Company must amend its Charter to increase authorized shares under DGCL § 242, as discussed in Section IV.C above.
B. Contractual Stockholder Consent Requirements
Wholly separate from the statutory requirements of the DGCL, the Company must analyze whether stockholder consent is required under the terms of its existing governance and investor agreements. Based on our understanding of the Company's current contractual framework, the following agreements are potentially relevant:
Amended and Restated Investors' Rights Agreement. This agreement, entered into in connection with the Series C financing, likely contains protective provisions requiring the consent of specified holders of preferred stock (typically holders of a majority of the outstanding shares of Series C Preferred Stock, or holders of a majority of the outstanding shares of all series of preferred stock, voting together as a single class) for certain corporate actions, which may include (i) the issuance of new securities (other than certain excluded issuances), (ii) the incurrence of indebtedness above a specified threshold, and/or (iii) the creation of any new class or series of equity securities having rights, preferences, or privileges senior to or on parity with those of the existing preferred stock.
Right of First Refusal and Co-Sale Agreement. This agreement may grant existing investors preemptive rights or rights of first refusal with respect to the issuance of new securities by the Company. If the convertible Notes (or the Conversion Shares issuable upon conversion thereof) constitute "New Securities" under the agreement, the Company may be obligated to offer the existing investors the opportunity to participate in the offering on a pro rata basis, or to obtain waivers of such rights.
Voting Agreement. This agreement may contain provisions requiring the consent of specified parties for certain corporate actions, including drag-along rights, tag-along rights, or board composition requirements that could be implicated by the proposed financing.
Additionally, the Company's Charter itself may contain protective provisions embedded in the terms of the Series A, Series B, or Series C Preferred Stock. It is common for venture-backed Delaware corporations to include in their certificates of designation (or the equivalent provisions of their charters) protective provisions requiring the consent of holders of a specified percentage of outstanding preferred stock for the corporation to (i) incur indebtedness in excess of a specified threshold, (ii) issue securities that are senior to or on parity with the preferred stock, or (iii) amend the charter in a manner that adversely affects the rights of the preferred stock.
We note as a practical matter that three of the four Purchasers in the proposed financing — Ridgeline (through its affiliated fund Ridgeline III, which participated in the Series C), Beacon Hill (a Series C co-lead), and Halcyon (the Series B lead) — are existing preferred stockholders of the Company. The participation of these investors in the bridge financing should facilitate the process of obtaining any required consents, as these investors are, by definition, supportive of the transaction. However, formal consents and waivers must nonetheless be obtained in proper form, and the Company must ensure that any consent thresholds are met (e.g., if consent of holders of a majority of the preferred stock is required, the combined holdings of Ridgeline III, Beacon Hill, and Halcyon must be verified to constitute a majority).
Recommendation. A detailed analysis of the contractual consent requirements under the Charter, the Amended and Restated Investors' Rights Agreement, the Right of First Refusal and Co-Sale Agreement, and the Voting Agreement will be addressed in a separate memorandum. We anticipate circulating that memorandum on or about December 1, 2023. In the interim, we request that the Company provide us with current, fully executed copies of each of these agreements and the Charter.
C. Recommended Approach: Written Consent of Stockholders
Even in the absence of a statutory requirement for stockholder approval of the note issuance, we recommend that the Company obtain a Written Consent of Stockholders in Lieu of Special Meeting pursuant to DGCL § 228. Our recommendation is based on the following considerations:
(a) Contractual compliance. A stockholder consent will satisfy any protective provisions in the Charter or investor agreements that require the consent of holders of a specified percentage of preferred stock (or of all outstanding stock) for the issuance of new securities or the incurrence of new indebtedness.
(b) Approval of the convertible note issuance and share reservation. The stockholder consent will formally approve the issuance of the Notes in the aggregate principal amount of $60,000,000, the reservation of shares for issuance upon conversion, and, if applicable, any increase in the number of authorized shares.
(c) Amendment of existing agreements. The closing of the convertible note financing will likely require amendments to the Amended and Restated Investors' Rights Agreement and the Right of First Refusal and Co-Sale Agreement to add the Purchasers (or those Purchasers that are not already parties) as parties and to grant them the registration rights, information rights, and other rights afforded to investors under those agreements. These amendments will require the consent of holders of a specified percentage of the registrable securities or shares, as provided in the respective agreements.
(d) Best practice and defensive posture. Obtaining stockholder consent, even where not strictly required, provides an additional layer of procedural protection against any future challenge to the validity of the transaction by a disgruntled stockholder. It also demonstrates the Board's commitment to transparency and good governance.
Mechanics of Written Consent Under DGCL § 228. Section 228(a) of the DGCL permits stockholders to act by written consent in lieu of a meeting, provided that the consent or consents are signed by holders of "outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted." 8 Del. C. § 228(a). In practice, this means that the Company must circulate the written consent to its stockholders and obtain the signatures of holders of the requisite number of shares, which will depend on the specific approval thresholds applicable to the actions being approved.
Notice to Non-Consenting Stockholders. DGCL § 228(e) requires that, if an action is taken by written consent of less than the unanimous written consent of all stockholders, "prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders . . . who have not consented in writing . . . ." 8 Del. C. § 228(e). We will prepare the required notice for distribution to non-consenting stockholders promptly following receipt of the executed stockholder consent.
VI. FIDUCIARY DUTY CONSIDERATIONS
A. Board Fiduciary Duties
In authorizing the proposed convertible note issuance, the members of the Board owe fiduciary duties of care and loyalty to the Company and its stockholders. These duties require directors to act on an informed basis, in good faith, and in the honest belief that the action taken is in the best interest of the corporation and its stockholders.
Under the well-established business judgment rule, Delaware courts afford a presumption that, in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action was in the best interest of the company. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The business judgment rule provides a powerful shield against stockholder challenges to board decisions, but the presumption may be rebutted if a plaintiff can demonstrate that the directors breached their duty of care (by acting in an uninformed manner) or their duty of loyalty (by acting in a self-interested manner or in bad faith).
The proposed convertible note financing serves a clear and compelling corporate purpose. Based on the financial information provided by the Company's management, the Company currently has approximately $18.5 million in cash on hand and is experiencing a monthly cash burn rate of approximately $4.8 million. At this burn rate, the Company's pre-bridge cash runway is approximately 3.9 months (approximately $18.5 million ÷ $4.8 million per month), which would be exhausted in approximately early March 2024. The proposed $60,000,000 convertible note financing would increase the Company's cash position to approximately $78.5 million (assuming a single tranche funding at closing), extending the Company's runway to approximately 16.4 months (approximately $78.5 million ÷ $4.8 million per month), or through approximately March 2025. This extended runway would provide the Company with sufficient time to achieve additional business milestones and to prepare for and consummate the anticipated Series D preferred stock financing.
Under these circumstances, the Board's decision to authorize the bridge financing is well within the bounds of reasonable business judgment and serves the legitimate corporate purpose of ensuring the Company's continued operations and positioning it for future growth.
B. Informed Decision-Making
To satisfy the duty of care and to preserve the protections of the business judgment rule, the Board should be fully informed about the material aspects of the proposed transaction before approving it. We recommend that the Board be provided with the following materials in advance of (or concurrently with) the circulation of the Board Consent:
(a) Summary of material terms. A clear and comprehensive summary of the material terms of the convertible note financing, including the principal amount, interest rate, maturity date, conversion mechanics (Discount and cap), Change of Control premium, MFN Provision, and subordination provisions.
(b) Financial condition and runway analysis. A presentation prepared by the Company's Chief Financial Officer summarizing the Company's current financial condition, including current cash position, monthly burn rate, projected pre-bridge runway, and projected post-bridge runway. This analysis should also address any material assumptions underlying the projections.
(c) Market comparison. A comparison of the proposed terms of the convertible note financing — including the $750,000,000 valuation cap, the 20% conversion discount, the 6.00% interest rate, and the 2.0x Change of Control premium — to market terms for comparable convertible bridge financings in the fintech and enterprise SaaS sectors. This comparison will enable the Board to evaluate whether the proposed terms are within the range of reasonableness and consistent with prevailing market practice.
(d) Conflicts disclosure. A clear identification of any actual or potential conflicts of interest, including the fact that certain existing investors with board representation are participating in the bridge round (as discussed in Section VI.C below).
(e) Transaction documents. Drafts or substantially final versions of the Note Purchase Agreement, the form of Convertible Promissory Note, the Subordination Agreement, and any related transaction documents.
We recommend that the Company prepare a board presentation summarizing the foregoing information for distribution to the Board. Calderwood & Harkness can assist in the preparation of this presentation if requested.
C. Conflicts Analysis
Three of the four Purchasers in the proposed bridge financing — Ridgeline (through its affiliate Ridgeline III), Beacon Hill, and Halcyon — are existing preferred stockholders of the Company that may have designees or affiliated persons serving on the Board. This creates actual or potential conflicts of interest that require careful management.
Ridgeline. Ridgeline Ventures Fund III, L.P. is an existing Series C preferred stockholder. Ridgeline Ventures Fund IV, L.P. — the lead investor in the proposed bridge financing — is a separate fund managed by the same general partner or management company. If any Ridgeline-affiliated individual serves as a director on the Skybridge Board, that director has a financial interest in the bridge transaction (through Ridgeline IV's participation) that is separate from the interests of the Company and its stockholders generally. Such a director should disclose the conflict to the Board prior to any vote or consent.
Halcyon and Beacon Hill. Similarly, Halcyon Growth Equity, L.P. (the Series B lead) and Beacon Hill Capital Partners, LLC (a Series C co-lead) are both existing preferred stockholders and proposed Purchasers. If either entity has an affiliated director on the Board, the same conflict considerations apply.
DGCL § 144 provides a statutory safe harbor for transactions in which a director has a personal financial interest. Under Section 144, an interested director transaction is not void or voidable solely because of the director's interest if any one of the following conditions is satisfied:
(i) Informed disinterested director approval. The material facts as to the director's relationship or interest and as to the contract or transaction are disclosed to or known by the board of directors or the committee thereof, and the board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum.
(ii) Informed disinterested stockholder approval. The material facts as to the director's relationship or interest and as to the contract or transaction are disclosed to or known by the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by the vote of the stockholders.
(iii) Entire fairness. The contract or transaction is fair as to the corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof, or the stockholders.
8 Del. C. § 144(a).
We recommend the following approach to address potential conflicts:
(a) All directors with affiliations to any of the Purchasers should fully disclose the nature and extent of their interest in the transaction to the Board prior to the Board's consideration of the Board Consent.
(b) To the extent practicable, the Board should ensure that a majority of disinterested directors (i.e., directors who are not affiliated with any Purchaser) affirmatively authorize the transaction, thereby satisfying the safe harbor of Section 144(a)(1). If the Board includes fewer than three disinterested directors, consideration should be given to whether a special committee of disinterested directors should be formed to review and approve the transaction terms.
(c) The stockholder consent process recommended in Section V.C above will provide an additional layer of protection under Section 144(a)(2), as approval by a majority of disinterested stockholders would independently satisfy the safe harbor.
(d) All disclosures and deliberations should be carefully documented in the Board Consent and any minutes or supporting memoranda.
VII. SUBORDINATION AND INTERCREDITOR MATTERS
A. Subordination of Notes to the Kelvantis Facility
As described in Section II.D above, the convertible Notes will be expressly subordinated in right of payment to the Company's existing obligations under the $15,000,000 venture debt facility with Kelvantis Lending Corp. This subordination will be documented in a Subordination Agreement to be executed at closing among Kelvantis (as senior lender), the Noteholders (as subordinated creditors), and the Company. The Subordination Agreement will establish the relative priority of claims between Kelvantis and the Noteholders, including provisions governing:
(i) the priority of payments to Kelvantis in the event of the Company's bankruptcy, insolvency, or liquidation;
(ii) restrictions on the Company's ability to make payments to the Noteholders while certain senior obligations remain outstanding;
(iii) standstill periods during which the Noteholders may not exercise remedies upon a default under the Notes; and
(iv) the Noteholders' agreement to subordinate their security interests (if any) to those of Kelvantis.
Additionally, the Kelvantis LSA contains a negative covenant that restricts the Company from incurring additional indebtedness without Kelvantis's prior written consent. The issuance of the $60,000,000 in convertible Notes will constitute the incurrence of additional indebtedness that triggers this covenant. Accordingly, the Company must obtain a written consent and waiver from Kelvantis prior to, or concurrently with, the closing of the convertible note offering. The consent should confirm that Kelvantis consents to the issuance of the Notes on the terms described herein and waives any default or event of default that would otherwise arise under the Kelvantis LSA as a result of such issuance.
The specific terms of the Kelvantis LSA, the required lender consent, and the form of the Subordination Agreement are addressed in detail in a separate memorandum that we are preparing, with an anticipated distribution date of November 28, 2023.
B. Delaware Law Considerations for Subordination
Under Delaware law, subordination agreements among creditors of a corporation are enforceable contractual arrangements. Delaware courts have consistently upheld the enforceability of intercreditor agreements in which junior creditors agree to subordinate their claims to those of senior creditors, provided that the agreements satisfy basic contract formation requirements (offer, acceptance, consideration, and mutual assent). See Revised Uniform Commercial Code § 9-339 (as adopted in Delaware at 6 Del. C. § 9-339) (providing that a subordination agreement is enforceable to the extent provided therein); see also 11 U.S.C. § 510(a) (providing that subordination agreements are enforceable in bankruptcy to the same extent they are enforceable under applicable nonbankruptcy law).
The Board resolution authorizing the transaction should expressly reference and approve the Subordination Agreement as one of the transaction documents that the Company's officers are authorized to negotiate, execute, and deliver.
VIII. SECURITIES LAW INTERACTION (BRIEF NOTE)
While the focus of this memorandum is on the corporate law requirements under the DGCL, we note briefly that the convertible Notes constitute "securities" under both federal and state securities laws and that the offering must comply with applicable registration or exemption requirements.
Federal Securities Laws. The offering of the Notes will rely on the private placement exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. All four Purchasers are institutional investors that qualify as "accredited investors" within the meaning of Rule 501(a) of Regulation D. The Company will not engage in any general solicitation or general advertising in connection with the offering.
Form D Filing. The Company will be required to file a Form D with the Securities and Exchange Commission within fifteen (15) calendar days after the first sale of Notes. We will prepare and file the Form D on behalf of the Company.
State Blue Sky Filings. Depending on the principal office or state of organization of each Purchaser, the Company may be required to make notice filings under the blue sky laws of certain states, including Delaware, Massachusetts, Illinois, California, and Washington. We will analyze the specific blue sky filing requirements and coordinate the necessary filings.
Separate Memorandum. A detailed analysis of the federal and state securities law requirements for the offering, including Regulation D compliance, purchaser qualification, investment representation and documentation requirements, and blue sky considerations, is being prepared and will be distributed to the Company on or about November 17, 2023.
IX. RECOMMENDED ACTIONS AND NEXT STEPS
Based on the analysis set forth in this memorandum, we recommend that the Company and its counsel take the following actions in the near term to advance the proposed convertible note financing:
1. Confirm authorized share count. As a first priority, the Company should provide Calderwood & Harkness with (a) the current Amended and Restated Certificate of Incorporation (including all certificates of amendment and certificates of designation), (b) a current, fully detailed capitalization table showing all authorized, issued, outstanding, and reserved shares by class and series, including the option pool, outstanding warrants, and any other commitments to issue shares, and (c) the current reservation schedule. Upon receipt, we will prepare a definitive share sufficiency analysis to confirm that the Company has sufficient authorized but unissued and unreserved shares to accommodate the approximately 4,347,000 Conversion Shares issuable upon full conversion of the Notes at the cap-implied price. If the authorized share pool is insufficient, we will advise on the process and timeline for a charter amendment under DGCL § 242.
2. Prepare board consent. We will prepare a draft Unanimous Written Consent of the Board of Directors authorizing (a) the issuance of the convertible Notes in the aggregate principal amount of up to $60,000,000, (b) the material terms of the Notes as set forth in the Note Purchase Agreement, (c) the reservation of shares for issuance upon conversion, (d) the execution and delivery of the Note Purchase Agreement, the form of Note, the Subordination Agreement, amendments to existing investor agreements, and all related transaction documents, and (e) the authorization of the Company's officers to take all actions necessary to consummate the transaction.
3. Prepare stockholder consent. We will prepare a draft Written Consent of Stockholders in Lieu of Special Meeting, to be circulated to holders of the requisite number of shares for execution. The stockholder consent will approve (a) the convertible note issuance and the reservation of shares for conversion, (b) any charter amendment required to increase authorized shares (if applicable), and (c) the amendments to the Amended and Restated Investors' Rights Agreement and the Right of First Refusal and Co-Sale Agreement needed to add the Purchasers as parties thereto.
4. Prepare Section 228(e) notice. Following receipt of the executed stockholder consent, we will prepare and distribute the notice required by DGCL § 228(e) to all stockholders who did not execute the consent.
5. Review protective provisions. We will complete our detailed analysis of the contractual consent and waiver requirements under the Charter, the Amended and Restated Investors' Rights Agreement, the Right of First Refusal and Co-Sale Agreement, and the Voting Agreement. This analysis will be the subject of a separate memorandum, which we anticipate circulating on or about December 1, 2023.
6. Board presentation. We recommend that the Company's management prepare a board presentation summarizing the material terms of the proposed financing, the Company's current financial condition and runway analysis, a comparison of the proposed terms to market terms for comparable transactions, and an identification of any conflicts of interest. Calderwood & Harkness is available to assist in the preparation of this presentation.
7. Coordinate with Kelvantis consent process. The Company must obtain Kelvantis's prior written consent and waiver under the Kelvantis LSA before the convertible Notes may be issued. We will coordinate with the Company and Kelvantis's counsel to ensure that the lender consent is obtained prior to or concurrently with the closing of the offering. The Kelvantis covenant analysis and consent process are addressed in our separate memorandum dated November 28, 2023.
X. CONCLUSION
Based on our preliminary analysis of the applicable provisions of the Delaware General Corporation Law, we conclude as follows:
The Board of Directors of Skybridge Fintech Ltd. has full statutory authority under the DGCL — specifically, under Sections 122(13), 141(a), 152, 153, and 157 — to authorize the issuance of convertible promissory notes in the aggregate principal amount of $60,000,000 and the reservation of shares of the Company's capital stock for issuance upon conversion of the Notes. Board authorization is the only statutory prerequisite; no stockholder vote or consent is required by statute for the issuance of the Notes or the reservation of Conversion Shares, subject to confirmation that the Company has a sufficient number of authorized but unissued and unreserved shares to cover the maximum conversion scenario (approximately 4,347,000 shares at the cap-implied conversion price).
If the Company's authorized share pool is insufficient, a charter amendment to increase authorized shares under DGCL § 242 will be required, which necessitates both Board approval and the affirmative vote (or written consent) of a majority of the outstanding shares entitled to vote thereon.