Wasted Paper, Inefficiency and the Infamous “Secretary’s Certificate”

June 27th, 2008

I recently re-read attorney Ted Wang‘s great proposal to simplify Series A financing documents in venture capital investment transactions.  He is completely correct that there is a lot of inefficiency in the way those deals are structured.  A bit of housecleaning would streamline the process a bunch.

The counterargument is that as attorney I don’t want to spend a huge amount of time renegotiating the form of the documents.  Ted has a few suggestions that will take more effort to adopt widely, and others that are really no-brainers in almost every deal, venture financing or otherwise.

Number 1 for me on the no-brainer list is the Secretary’s certificate and incumbency certificates that go along with most transactions.  These say that the Board has approved the transaction and that the people who sign the documents actually hold the offices they say they do.

This is a pet peeve of mine because the company already represents and warrants in the agreement that Board has approved the deal.  Saying it again in a separate document serves no benefit.  As well, the people who sign the incumbency certificate are, at least in most smaller companies, the same as the ones who signed the agreement.  Getting them to verify their titles adds no material benefit.

There is an exception here- if the deal is signed on one day and closed on a different one, then I completely understand the value in “bringing down” all of the reps and warranties to the closing date and verifying that the information in the agreement remains up to date.

Where this leaves us: the Secretary’s certificate and incumbency certificate are unnecessary in 99% of deals and result in extra time spent drafting and wasted paper.  However, they are valuable once in a while and I don’t want to bill my clients for time spent fretting with opposing counsel about whether this might be one such case.

So here’s my suggestion: leave the language requiring those certificates in the document, but add a short line saying that the certificates must only be delivered if the closing occurs on a different day from signing of the documents.

It’s a simple suggestion- 10 minutes to discuss and drop a phrase into the relevant part of agreements that could cut out an hour or two of attorney drafting and review time.  We’ll see how it works in the real world.

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  • I've not practiced in this area, so forgive a clueless newbie question: Am I right in assuming that asking for a secretary's certificate is an unthinking reflex by the money's lawyers, who hope to create as many possible causes of action, against as many possible individual defendants, as they can, just to give them more leverage in the future?

    If that's the case, I'm curious what the real-world ROI is on the parties' collective expense of drafting, reviewing, and negotiating the certificate.

  • No, the officers don't sign in their personal capacities, so it
    doesn't create additional defendants. It comes purely from
    transactions where the document is signed on one day and closes on a
    different day. In that case, it would make sense to “bring down” the
    representations and warranties- which explicitly applied when the deal
    was signed- to the closing date. When the sign & close are on the
    same day there is no value in the certificates.

    At the same time, it isn't worth everyone's time to figure out which
    deals are sign/close, which ones will have a delay and which ones
    *might* but no one is quite sure. The suggestion then, is to leave
    the certificates in the agreement, but say that if the parties sign &
    close on the same day then delivery is waived.

  • No, the officers don't sign in their personal capacities, so it
    doesn't create additional defendants. It comes purely from
    transactions where the document is signed on one day and closes on a
    different day. In that case, it would make sense to “bring down” the
    representations and warranties- which explicitly applied when the deal
    was signed- to the closing date. When the sign & close are on the
    same day there is no value in the certificates.

    At the same time, it isn't worth everyone's time to figure out which
    deals are sign/close, which ones will have a delay and which ones
    *might* but no one is quite sure. The suggestion then, is to leave
    the certificates in the agreement, but say that if the parties sign &
    close on the same day then delivery is waived.