What is a Share Subscription Agreement and How Does it Differ From a Share Purchase Agreement?
A common way that companies grow and develop is by raising funds. To raise capital or seek new investors, companies may require either a share subscription agreement or a share purchase agreement. Both agreements create a relationship between the investor and the company by granting the investor with shares. However, it is important to understand how both agreements differ operationally and in what circumstances they are required.
Share Subscription Agreements
A share subscription agreement is a promise by a potential shareholder, also know as a subscriber, to make payment of funds to a company in an agreed number of “tranches” in return for the company issuing and allotting a certain number of shares at a certain price such that the subscriber becomes a shareholder. A share subscription agreement must include the number of shares that will be issued to the shareholder, and the order and timing by which funds will be advanced.
The primary objective of share subscription agreements is to document the mechanics of the subscriber’s investment in the company and to compel both parties to complete the investment procedure without any ambiguity.
Key Components of a Share Subscription Agreement
Share subscription agreements can vary depending on the needs of the parties and the types of shares being subscribed for, however, common clauses include:
1. Conditions precedent: acts which must occur before the agreement is to come into force, for example, the directors of the company may have to pass certain resolutions in order to sign the subscription agreement;
2. Tranches: the amount to be paid by the subscriber to the company at a prescribed time, including the timing of payment and any instalment schedules, in exchange for an agreed amount of shares;
3. Restraint: the subscriber may be restrained from engaging in business or activity that would be in competition with the business of the company;
4. Confidentiality: both the subscriber and the company may be obligated to keep information relating to the subscription agreement confidential;
5. Warranty and indemnity: the subscriber may warrant that they are willing and able to meet their obligations under the subscription agreement and indemnify the company against certain claims and losses; and
6. Conditions subsequent: acts which must occur after the date the subscriber has paid the subscription price to the company, for example, the company must issue the shares and provide a share certificate to the subscriber.
Share Purchase Agreements
A share purchase agreement documents the sale and purchase of existing shares in a company. Unlike a share subscription agreement where new shares are issued to the subscriber, a share purchase agreement involves the transfer of ownership of shares from an existing shareholder to a buyer. A share purchase agreement outlines the terms and conditions of the sale of shares, the number and class of shares being sold, the purchase price, warranties from the seller about the company and the shares and any covenants attached to the shares.
In a share purchase agreement, the seller may be either a major shareholder or a minor shareholder selling all or some of the existing shares they hold to a buyer. The buyer of the shares in the company may be an existing shareholder or a third party wanting to invest in or acquire the company.
Key Components of a Share Purchase Agreement
Share purchase agreements are often drafted to address the specific needs of the parties, the circumstances of the company and any associated risks. When a buyer acquires shares in a company, the buyer also acquires the liabilities of the company. To address this, share purchase agreements often contain a due diligence clause whereby completion of the transaction will be subject to the buyer’s satisfaction of various investigations to identify any risks to the proposed purchase.
Investigations carried out by the buyer as a part of due diligence can include review of the assets and liabilities of the company, operations of the company, review of the commercial contracts on foot and review of any licences or permits. The nature and scope of the due diligence investigation will depend on a variety of factors, including the size of the deal, the structure of the transaction, the business of the company, and the amount of time and money available to the buyer for the investigation.
In addition to a due diligence clause, other clauses commonly used in share purchase agreements include:
1. Description of shares: the share purchase agreement will set out the number and type of shares being sold. It is important that the buyer understands the type of shares they are purchasing as different share types may have different rights, for example, voting, dividends and capital;
2. Purchase price and payment terms: the share purchase agreement will include the purchase price of the shares, how the price will be calculated, whether any adjustments to the purchase price will be made and the method that the buyer is required to pay the purchase price;
3. Conditions precedent: similar to subscription agreements, certain conditions must be satisfied before the transaction can be completed, such as the buyer being satisfied with the results of its due diligence enquiries;
4. Completion: once the shares have been transferred to the buyer, the sale is complete. The share sale agreement should specify when, where and how completion will take place, including what documents the seller must make available to the buyer;
5. Representations and Warranties: representations and warranties are given by both the buyer and the seller to disclose material information to each other. Under a share purchase agreement, the seller’s representations are more extensive than those provided by the buyer. For example, representation and warranties provided by the seller in a share holders agreement include information about the company assets, liabilities, financial position, encumbrances and agreements with parties;
6. Seller’s obligations post completion: share sale agreements will also often contain obligations of the buyer and the seller after completion of the sale. For example, the agreement may contain a restraint of trade clause which prevents the seller from being involved in competing business for an agreed period of time; and
7. Termination: Share purchase agreements should specify when the parties may terminate the agreement and the consequences of termination.
Key Differences
While share subscription agreements and share purchase agreements share some common elements, they differ in several key aspects:
1. Nature of Transaction: Share subscription agreements involve the issuance of new shares by the company, while share purchase agreements involve the transfer of existing shares between shareholders or third-party investors;
2. Timing: Share subscription agreements are typically used in primary market transactions, where shares are issued directly by the company to investors. Share purchase agreements are more common in secondary market transactions, where existing shares are bought and sold between investors; and
3. Risk: Share subscription agreements carry inherent risks associated with investing in newly issued shares, such as uncertainties regarding the company’s future performance. Share purchase agreements involve the acquisition of established shares, with risks related to the company’s past performance and existing liabilities.
What isn’t covered in share subscription agreements and share purchase agreements
If only a portion a company’s shares are being sold, a buyer would normally be required to enter into a shareholders agreement with the existing shareholders. This is usually done through a deed of accession (where the buyer will be bound by an existing agreement), or by creating a new shareholders agreement. The shareholders agreement explains how the relationship between the shareholders will work after the sale has occurred, including how decisions will be made, the rights and obligations of each shareholder and how shares are to be sold.
While both subscription agreements and share purchase agreements are important instruments in corporate transactions, they serve distinct purposes and involve different sets of considerations. Whether raising capital or acquiring ownership interests, understanding the nuances of these agreements is essential for navigating the complexities of corporate finance and investment.
