Published Thu, 20 Apr 2023 Corporate Law
One of the most widely utilized methods by companies to raise funds is through an Initial Public Offering (“IPO”), where the company sells the shares to the general public. However, startups are not in the position to attract public investors at an early stage of growth and then they look toward private investors for funding. When such private investors are roped in for funding, the transaction is done by executing a Share Subscription Agreement.
A subscription agreement is an official legal agreement between a firm and an investor to purchase shares of the company at a specified price. The subscription agreement includes all the necessary information. The nuances related to the investment, such as the corporation issuing the shares and the investor purchasing the shares, will be covered in detail. Additionally, it will contain information on the class and number of shares the business is issuing.
When raising money from family, friends, venture capital investors or angel investors in seed or series A rounds, startup founders commonly execute a share subscription agreement with details representations and warranties to have clarity regarding mechanics of the investment.
At the time of making investment the first document a company releases is a share subscription agreement. An investor learns through this agreement about his control, position, and investment returns that he will receive following the allocation of the shares. This agreement should be written in a way that will be advantageous to both the firm and the investor, i.e., to lower the investor's risk and maintain the company's authority and duties following the investment.
The majority of share subscription agreements include a certain percentage of guaranteed returns on the amount invested for private investors. However, some subscription agreements offer a portion of the business's income as compensation for putting in the predetermined sum.
A subscription agreement becomes an effective tool for the general partners to ensure that the company receives adequate funds while the private investor can realise profits on the invested amount. Here are the advantages of a share subscription agreement:
Limited Liability: 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.
One time-Investment: The subscription agreement makes for a great way to invest a lump sum amount and realize returns as the potential investors are required to invest a pre-specified amount as a one-time investment.
Investment Growth: The subscription agreement allows investors to invest in companies at the early stage of their growth. As businesses may grow to be worth billions, the amount invested by the private investors can multiply by a huge margin with time, allowing them to get high returns on the investment.
Easier Funding: Not every company wants to list on the stock exchange for raising funds as the issue may be unsuccessful based on the company’s present condition. Hence, general partners of the company utilise subscription agreements to raise funds without having to offer the shares to the general public.
Conditions Precedent: The Condition Precedent Clause is generally contains all the details of the condition to be. It should be exhaustively provided for all approvals, authorizations, permissions and permits which are necessary before and after execution of the transaction, both internal and external and the person responsible for obtaining each of these should also be stated. The conditions precedent clause should also provide for fulfilling all the representations, warranties, obligations, execution of agreements and covenants specified under the agreement
Representation and Warranties: Under this clause the subscriber represents about receiving all the relevant information and documents of the Company in which investment is to be made. The subscriber can even provide for meeting the financial commitment and their obligations. The warranty clause is generally a promise made by the directors and members of the company that all the information provided from their end is true in every sense and all the information delivered to the potential investor is correct in all aspects.
Subscription: This clause shall lay down the number of shares purchased and at what price including the current shareholding of the Company.
Right of First Refusal: It is common to include provisions in a shareholders’ agreement to provide that any existing shareholder must first offer his/her shares to the other remaining shareholders at a certain price. Under ROFR, the Shareholders are restricted from selling their shares to an unrelated third-party without giving an offer to purchase to other Parties to this Agreement.
Drag-Along Rights: This clause gives majority Shareholders who want to dispose their shareholding to an unrelated third-party, a right to force the remaining minority shareholders to dispose their shares on predetermined terms as well
Lock In Period: Minimum duration for which the shares are to be held by the investor.
Exit Rights: This clause provides for the exit options available in case of breach of terms and conditions.
Indemnity: Any of .it is a bit time taking process and costly.
Termination: This clause provides for termination by the following ways:
By the mutual consent of both the parties.
By the company- if the investor fails to pay for the share subscription on the completion date or if an investor breaches any terms and conditions of the agreement.
By the investor- if the company fails to provide condition precedent or any breach committed by the company, any adverse change occurs before the completion date.
Any party willing to terminate the agreement on the ground of the clauses mentioned above shall issue a notice to the other party.
Indemnification clause provides for the limits of liability and the process for reimbursement of indemnity claims and is considered as the most scrutinized clause in case of disputes, therefore, attention has to be paid to ensure that the parties are adequately covered in case of issues relating to the transactions emerge. In this clause the parties to the agreement promise to indemnify the other parties against any losses, occurred because of wrong and malafide information in the warranties and representation clause.
11. Dispute Resolution and Arbitration
A share purchase agreement should set out the process for the resolution of any disputes between the parties to the shareholder’s agreement. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.
A Share Subscription Agreement is a crucial legal instrument that may be used by a business that doesn't want to go public to generate money and bring in silent partners to its structure. Private investors can also make use of the subscription agreement to invest in a firm ahead of time and watch as their money increases over time. Get Free Share Subscription Agreement With CompaniesNext