The “Manner of Use” clause
Most investment agreements and subscription of capital agreements allow
investors to expressly provide how their invested capital is to be utilised by
the target company (via a “Manner of Use” clause) or require the target
company to state how it will use the investment monies (a “Manner of Use
Document”). A difference between the investor's intentions and the
company's use of investment monies gave rise to the dispute in the recent
case of Tembusu Growth Fund Ltd v Actatek, Inc and others  SGHCR
This case emphasises the importance of ensuring that both the Manner of
Use clause and the Manner of Use Document (if such a document is utilised)
are recognised as integral to the investment agreement. Proper integration
will prevent the company from using the investment monies for purposes
outside the investor's intention. This is particularly important when venture
capitalists and fund managers are not involved in the daily operations of the
company and may not be able to actively monitor the use of funds by the
company and its management.
Background to the dispute
Tembusu Growth Fund Ltd (Tembusu) agreed to invest S$1.5 million in
Actatek, Inc (Actatek) and entered into negotiations with Actatek over a
convertible loan agreement (Agreement) for that purpose. The emails
exchanged between the directors of Actatek and officers of Tembusu during
the course of negotiations (which were excerpted in the grounds of judgment)
showed attempts by the Actatek directors to include payments to themselves
in addition to the original terms of the investment.
The High Court accepted that Tembusu had sufficiently disagreed with such
attempts before the Agreement was concluded and noted that the purpose of
Tembusu's investment was to keep the Actatek group "functioning as a going
concern, to facilitate expansion and restructuring of the group and to ensure
that it had sufficient funds to achieve listing"; a purpose familiar to various
When the Agreement was concluded, it contained a condition to the release
of investment monies: the Manner of Use clause. This clause required
Actatek to deliver a Manner of Use Document detailing how it will use the
proceeds of the investment and an execution plan for its expansion.
According to the Manner of Use Document drawn up by Actatek, Tembusu's
investment would be used generally in “Sales and marketing expenses, R&D
expenditure, IPO, and Working Capital". However, Actatek used some of the
investment monies to repay monies owing to its directors.
When Tembusu discovered this, it commenced a summary judgement action
which was heard before an Assistant Registrar of the High Court.
Arguments before the court
The Agreement contained a common boilerplate - the ‘Entire Agreement’
clause. This was worded such as to cancel “all previous representations,
warranties, agreements and understandings between the Parties with respect
to the subject matter”.
While both Tembusu and Actatek agreed that it was a condition precedent of
the Agreement for Actatek to deliver the Manner of Use Document, they
could not agree on whether it was a condition that Actatek abide by the uses
stated in that document.
It was Tembusu's contention that the terms of the Agreement could be
implied, if not expressly provided, to require Actatek to abide with the Manner
of Use Document. Tembusu believed that by making payments to its
directors from the investment monies, Actatek had departed from the Manner
of Use Document and thus Actatek had breached the Agreement.
Actatek however claimed that there was no provision in the Agreement
limiting its use of the proceeds and even if there were such a limiting
condition, it believed it had not deviated from the Manner of Use Document.
The High Court had to specifically determine two issues:-
- whether the entire agreement clause in the Agreement can be
interpreted to exclude the uses stated in the Manner of Use
Documents as terms of the Agreement; and
- whether a term could be implied in the Agreement that proceeds from
the investment could only be used in the manners specifically stated
in the Manner of Use Document (unless otherwise agreed by
Was "Manner of Use" a term of the Agreement and did parties have to
abide by the Manner of Use Document?
The Assistant Registrar found that the way the entire agreement clause was
drafted did not successfully exclude terms from being implied into the
He referred to an example of an entire agreement clause in Ng Giap Hon v
Westcomb Securities Pte Ltd and others  3 SLR (R) 518 (Westcomb
Securities) that expressly excluded implied terms:-
Entire Understanding: This Agreement embodies the entire
understanding of the parties and there are no provisions, terms,
conditions or obligations, oral or written, expressed or implied, other than
those contained herein. All obligations of the parties to each other under
previous agreements ([if] any) are hereby released, but without prejudice
to any rights which have already accrued to either party.” [emphasis in
The Assistant Registrar compared the above example with the clause used in
Tembusu and Actatek's Agreement:-
“Entire Agreement: This Agreement embodies all the terms and
conditions agreed to by the Parties and supersedes and cancels all
previous representations, warranties, agreements and understandings
between the Parties with respect to subject matter herein whether such
be written or oral.”
In that regard the Assistant Registrar found the entire agreement clause in
Tembusu and Actatek's Agreement did not contain such "clear and
unambiguous language" so as to exclude implied terms, which the entire
agreement clause in Westcomb Securities did by making explicit reference to
the exclusion of any implied terms.
Turning on the interpretation of the entire agreement clause in the
Agreement, the circumstances and context of the negotiations and the
contract, it was found that the Manner of Use Document was, by implication,
part of the Agreement. On this reasoning, the High Court found it to be an
implied condition of the Agreement that the investment monies be used only
in accordance with Actatek’s stated uses in the Manner of Use Document and
consequently that payment of the salaries of Actatek’s directors was a breach
of that condition.
The Assistant Registrar further found that the Manner of Use Document was
not just descriptive but rather prescriptive. Actatek was bound to use the
investment monies in accordance with the Manner of Use Document. Unlike
an ordinary lender, the interest of a venture capitalist such as Tembusu in a
target company is to sustain and grow the company's business and in
Actatek's case, to list on the stock exchange after which Tembusu would
convert its loans into shares. Tembusu therefore had a direct interest in the
use of the investment monies.
The takeaway for investors to control use of invested funds
In order to avoid disputes and arguments similar to Tembusu and Actatek's,
investors (and lawyers) may find it prudent to detail the specific manner in
which investors intend for their target companies to use the investment
proceeds. They can do this via express provisions in the investment
agreement, either by incorporating a list of uses within the main agreement or
by express reference in the main agreement to an annexure detailing the
manner of use (i.e. a Manner of Use Document).
The investor can also strengthen its position with a clause providing that such
a list of uses is exhaustive and that the proceeds may not be used for any
other purpose except with the investor’s consent. For example, the investor
could consider stipulating that the invested funds will be used specifically for
expansion to other regions or purchase of capital equipment and not, unless
otherwise agreed or with the investor’s consent, be used to repay certain
debts or redeem shareholders’ loans.
On its part, a target company should clarify with its investors any doubts it
may have in the use of such funds, as the purpose it envisions or manner of use that it contemplates may not be all encompassed in general "Working
Capital" statements as is often provided in investment agreements.