Published Sat, 04 Mar 2023 | Updated Fri, 31 Mar 2023 Corporate Law
Both the Shareholders Agreement and the Share Subscription Agreement are executed while founding a company. Despite being two distinct papers, they are occasionally combined to form an investment agreement. For the sake of clarity, it is advised to maintain them separate. In this blog we'll examine some key distinctions between these two agreements below:
A share subscription agreement is essentially an agreement between the firm and the investor that involves the purchase of ownership in the company through the issue of additional shares. In a business, acquisition can either include the purchase of current securities or the issue of new shares. The primary goal of a share subscription agreement is to clarify all aspects of the SSA and to have a clear agreement with the shareholders that outlines the mechanics of the investor's investment(s) in the firm. This agreement's primary goal is to compel both parties to complete out the investment procedure without any ambiguity at a further stage.
Although it is not necessary to execute a share subscription agreement, but it is always recommended to have such an agreement as it proves to be valuable document since it will explicitly state the conditions under which a person (the subscriber) agrees to buy shares from the firm and it presents a potential investor’s intentions to join a limited partnership in a company. Under the subscription agreement, the terms are specified for the company to sell a certain number of shares in return for a predetermined amount from the private investor. The liability of potential investors under the subscription agreement is limited to the investor capital amount.
Share Subscription Agreement is a great deal for start-ups who want to raise funds at the early stage of their growth by acquiring capital.
Share Subscription Agreement is most preferred by the ventures at their early stage when the founders don't want to dilute their ownership stake.
Under the subscription agreement, the private investors’ liability is limited to the amount of capital investment. In the case of the company becoming bankrupt, the potential investor cannot be held liable to repay the lenders or any other entity from their personal wealth.
The subscription agreement makes for a great way to invest a lump sum amount and realise returns as the potential investors are required to invest a pre-specified amount as a one-time investment.
Parties to the Agreement
Definitions & interpretation
Term of the agreement
Subscription to the investor subscription securities
Representations & warranties
Termination and default
It is an official contract between the Company and its shareholders that establishes the rules for how a business will be operated. This agreement provides for an arrangement that regulates the relationship between the shareholders, the management of the company, ownership of the shares, rights, obligations, and protection of the shareholders. It may also command the way in which the company functions. A shareholder agreement is a crucial pillar on which to create a corporation when beginning a business that involves more than one individual putting money in the organisation. A shareholder agreement must be comprehensive. It should specify how the company will operate, how shareholder disputes will be resolved, and define the obligations and advantages of each shareholder.
A shareholders' agreement is necessary when a corporation is established and more than one individual will be contributing money to the business. This agreement should be created and signed as soon as a corporation is founded to avoid any complications or confusion during the company's formation.
Even if a Company has a few investors, a shareholders' agreement should be executed as a SHA would safeguard everyone's rights and interests and ensure that there always exists a straightforward, impartial method of resolving disputes.
It is a good practice to have a shareholders' agreement even if a corporation has articles of association that describe the rules and regulations for the business for further clarity and security.
SHA safeguards rights of the Shareholders.
It defines the different roles and responsibilities of the Shareholders
It provides predetermined dispute resolution procedures hereby saving money, time, and energy.
It defines and regulates the relationship between the management of the company and its shareholders.
Prohibits minority shareholders from transferring their shares to competitors or other parties.
Details of the Parties entering into this Agreement;
the total authorized capital of the Company;
the Shares held by each Shareholder and their percentage of Company ownership;
the details of the first refusal right by other Shareholders before transferring any Shares;
"drag-along rights" and "tag-along rights";
provisions related to the rights and obligations of the Directors/Board;
details related to the management of the Company;
Board of Directors
After having read in detail one can easily figure out the major difference between a SSA and SPA. The terms "Shareholders Agreement" and "Share Subscription Agreement" are used to refer to acquisitions made through the purchase of securities and the issuing of new shares, respectively.
A shareholders' agreement is necessary when a company is established and more than one individual will be contributing money to the business to avoid any problems or confusion in future. The rules for how the business will be conducted on a daily basis to maintain a constant and unrestricted workflow are outlined in the shareholders' agreement.
While at the time of receiving investment the first document a company releases is a share subscription agreement whereby an investor learns about his control, position, and investment returns that he will receive following the allocation of the shares. This agreement lowers the investor's risk and maintains the company's authority and duties following the investment.