During March, at the height of the first wave, we were informed that a large number of venture funds had decreased or stopped their investments.
By MEIR FUCHSIllustrative photo of Israeli money(photo credit: MARC ISRAEL SELLEM)
It appears that due to the pandemic there is an increase in the number of cases in which investors, especially foreign investors, are attempting to avoid living up to their obligations.During March, at the height of the first wave, we were informed that a large number of venture funds had decreased or stopped their investments.Israel’s portion in the international venture fund market is significant compared to its size and the research department at the Bank of Israel, which analyzed the financing trends of Israeli firms, confirmed in May that they had received approximately 4% of the total of global investments, whose financing comes mainly from foreign funds.The investments, according to the research, are divided into three: start up companies (with an exciting idea but no product); intermediate companies (with a product and sales but which are still striving to increase their business activities and reach profitability); and mature companies (those making a product or providing a service with a proven market that are already profitable).One can assume that venture funds will not dare breach an agreement with mature companies, since they have the financial wherewithal to contend with the fund.Young or companies in their intermediate stages, on the other hand, do not have the depth to contend with money resources and the army of lawyers that the venture fund can muster. Whether it is due to the coronavirus pandemic, or for other reasons, a growing number of venture funds are willing, sometimes, to breach signed agreements or to interpret them with a tilt in their favor, since they know full well that companies at the beginning of their corporate life would prefer to give in, or to settle, instead of insisting on their rights as opposed to the huge funds, since otherwise this may bring about their demise (if the withdrawal from the investment has not done so already).Considering the economic difficulties to which the venture funds are also not immune, their interest to retreat from agreements is increasing, and even if there is a detailed agreement for transferring money, many funds may look for reasons not to live up to the agreement, even at the risk that a claim will be filed against them.The savvy investors standing behind the funds know well that in the event that an Israeli company would wish to file a claim against them in Israel, such company will be required to pay court fees at the rate of 2.5% of the value of the claim, when the sum of the fee alone may reach tens of thousands of shekels or even more, this in addition to the legal fees that the claiming company will need to pay.There is, however, another route that is less known to many Israeli entrepreneurs, and that is filing a claim against the fund at its home base (mostly in the United States). This is much less convenient for the fund because of the negative buzz and the possible harm to its goodwill which such a claim will cause, and these are much more significant in its domicile.The courts located in the state registration of the fund have the jurisdiction to hear the claim by the fact of the registration in that state. This writer initiated and brought about the filing of a claim in Delaware, on behalf of Israeli shareholders who were discriminated against by a venture fund. Obviously, the venture fund will raise various arguments with the aim of transferring the jurisdiction back to Israel, but even if the investment agreement has explicit provisions stating that any dispute between the parties would be resolved solely before the courts in Israel, it is necessary to examine such clauses carefully in order to determine whether they indeed block the possibility of filing the claim abroad.In the US, for example, one does not pay a court fee upon opening a legal proceeding and the award of costs against the losing party is not automatic or customary. It is true that lawyers in the US receive much higher legal fees than their colleagues in Israel but it is possible to negotiate also with these firms, especially when there is a claim which has a good chance of success and where a victory will contribute greatly to the goodwill of the lawyer.In addition, there are funds that finance claims in cases where there is a claim of patent infringement, or in cases where there are solid grounds for a breach of an agreement. Therefore, also in this struggle between David and Goliath it is not yet necessary for David to pack his belongings and to leave the battlefield defeated.The writer is a partner in the firm of the firm of Gideon Koren & Co. and is a member of the Bar in Israel and in the State of New York.
