Understanding the Shareholder Agreement with Share Subscription Agreement

In a business, everything must be defined to optimize operations and relationships with stakeholders which is particularly important during capital raising. The key legal documents in this context are two – the Share Satellite Agreement and the Shareholder Agreement. These two agreements define the social contract of all parties in detail with respect to their accountabilities, obligations, and entitlements. In this article, we focus on the parts of all these agreements and their importance in any fundraising campaign.

Share Subscription Agreement (SSA)

The Share Subscription Agreement is an important document between the company, its promoters, and the investor. The company may issue new shares or the promoters may choose to transfer their shares, and in any case, the SSA governs the transaction. It is legally enforceable and contains all the details related to the investment.

Important Clauses in the Share Subscription Agreement

Definitions and Interpretation

Every legal document contains terms that, when ambiguously used, can render misunderstanding hence the need to itemize major words that will be used hence the need to include a powerful conceptual clause. In this case, words such as “promoter”, “act”, ‘company”, and “board” are example of words that need to be heavily defined.

Agreement for Funding:

This section explains the funding’s terms, such as the identity of the investor, the bank account which will be credited with the funds, and the particulars of the recipient.

Share Capital:

The SSA provides for the detail of the company’s share capital, which includes the total number of shares, the nominal value of each share, and the proportion of shares of the new investor.

Conditions Precedent to Closing:

This part outlines all the requirements that need to be satisfied prior to the finalization of the agreement such as due diligence, reference checks, signing of the term sheet, etc.

Closing and Closing Date:

It has the particulars of the time and modality of the closing of the agreement.

Representations and Warranties:

In this clause, promoters declare that they have not pledged or sold the shares to any other person and that the shares are in their name individually.

Shareholders Meeting:

The SSA provides for the schedules and locations of the shareholders’ meetings and the modalities of notification of investors.

Lock-in of Promoter’s Shares:

This clause provides the period of time during which the promoter’s shares cannot be sold.

Transferability, Voting, and Dividend Rights of Investors:

It covers how shares will be transferred, how these investors will vote, and how the dividends will be paid out to the investors.

Information and Inspection Rights:

All Investors are entitled to access company records and files, as they have invested money into the company’s business activities.

Pre-emption Rights of Investors:

Investors have the right to consent to any actions being taken by the company in regard to major restructures or share transfers prior to the action being taken by the firm.

Investors Exit:

This outlines how the investor can leave the business and what conditions they must meet in order to sell their shares.

Anti-dilution Rights of Investors:

This allows the investor to maintain these rights without the risk of being diluted when zero or more funds are raised by the corporation.

Liquidation Preference:

These provisions are made in order of priority to be followed regarding the distribution of proceeds from the liquidation of the company, not letting other stakeholders receive payment until the investors have being paid out.

Intellectual Property Rights:

Any agreement of this sort should state who the owner of the innovation and creativity shall be which includes patents, trademarks, and copyrights or any such thing.

Indemnity:

These parties must each bear the consequences of an infringement to the agreement or other matters as specified within the bounds of these agreements. Each party agrees to indemnify the other from any loss that results.

SHA – Shareholder Agreement

The SSA is less detailed as it only covers financial and operational issues related to the investor’s participation. Conversely, the Shareholder Agreement (SHA) is more precise as it concerns the relationships between the company’s shareholders which include both investors and promoters. SHA is an integrated contract which covers all aspects of a business, including, but not limited to, how the business is run, how decisions are made, and how conflicts are resolved.

Noteworthy Sections of the Shareholder Agreement:

Operations and Constitution:

The SHA describes the company’s governance and operational structure and the responsibilities of each stakeholder at the company.

Name and Place of the Business:

This section states the business name, the business registered address, and the type of business the company carries out in detail.

Share Capital:

The SHA also describes the current shareholding structure of the company, the previous share issuances, and the distribution of shares amongst the various investors and promoters.

Company’s Directors:

It deals with the board’s composition, for example, with how many directors is the company expeceted and how many new investors will add.

Voting Rights:

The document outlines the voting rights arrangements for both promoters and investors. Such provisions would be necessary in case of deadlock between directors where voting disputes need to be resolved.

Auditors:

SHA will determine who acts as the company auditors, outlining the scope of these tasks and the particulars which shall be provided to the shareholders. Share Sale or Transfer: This clause deals with share sales and transfers and includes how the right of first refusal will be exercised, which allows the company or current shareholders to purchase the shares before outsiders are offered the shares.

Working Capital:

The agreement specifies how the working capital of the company shall be utilized and controlled. Confidentiality: Investors and promoters agree not to divulge and restrict presentation of information about the company to unauthorized persons.

Covenants:

This part outlines the duties and undertakings that both parties are expected to follow during the engagement.

Termination:

In the event there is a breakdown in relations of the parties, SHA details the process for termination, which is by mutual consent, arbitration, or through the courts.

Modifications and Alterations:

The SHA may contain clauses that allow the terms of the agreement to be modified in the event of unforeseen circumstances, such as changes in the market conditions or surprises like the Covid 19 pandemic.

Transfer of Agreement:

This provision outlines who can transfer the SHA and makes sure that it is not assignable to outsiders without the consent of the other party.

Jurisdiction:

A clause that describes the competent courts for the resolution of conflicts in relation to the contract is the jurisdiction of the agreement.

Arbitration:

The SHA stipulates which of the parties to the agreement is to be the arbitrator in a conflict which guarantees that the disagreements will be resolved in an orderly manner.

Notice:

This part specifies who must receives notice and how communication is to be made.

Conclusion

The two documents that come with the Share Subscription Agreement are the Shareholder Agreement which deals with the incorporation of the company in relation to the fundraising activities of the investors. The SSA makes clear the financial terms of the arrangement and the SHA deals with structure, governance, operational issues and conflicts of interest. Collectively, these documents ensure that both the investors and the company founders have their interests catered for while minimizing conflict.

These agreements require a thorough plan, precise details, and good knowledge of what each party expects. It is highly advised that businesses consult a lawyer so that these documents are added accurately, and all parties are aware of their rights and responsibilities prior to any investment deal. With the correct templates for these agreements and proper self-education, you can prevent expensive errors and lay a strong groundwork for growth.