Both the share subscription agreement and the shareholders’ agreement are signed at the end of the due diligence process when forming a company. Although they are two different documents, sometimes they are merged into a single document, called investment agreement. However, it is recommended to keep them separately for clarity reasons.
The share subscription agreement is an application made by an investor to join a company
It is an exchange of promises between a potential shareholder known as a subscriber and a company. A share subscription agreement provides that the company agrees to sell a specific number of shares at a specific time and price, such that the subscriber becomes a shareholder. In return, the subscriber agrees to buy the shares at a specific time and a specific price. Share subscription agreements are common in limited partnerships where the general partner manages the entire partnership. In order to become a partner, one must meet the standard requirements imposed by the share subscription agreement.
After meeting the requirements, the manager partner decides whether to accept the subscriber. The limited partner usually acts as a silent partner that provides capital but does not participate in the operation of the business. The limited partner usually has no impact on the daily operations of the partnership and his activity is limited. Because of this, the partner’s exposure to risks and losses is limited to the initial investment that he or she made.
Typically, a share subscription agreement must include the number of shares the company agrees to issue to the shareholder and the order and timing by which the shareholder makes the payment. A share subscription agreement varies greatly based on the needs of each company but some of the common clauses included are confidentiality, satisfaction of condition precedent, tranches and warranty and indemnity.
Further, when a company wants to raise capital, it will either issue shares of stock to be purchased by the general public or through a private placement
Within the private placement procedure, after meeting the requirements, the new shareholder will receive a private placement memorandum. This memorandum provides a description of the investment, and it is usually accompanied by a share subscription agreement.
On the other hand, the shareholders’ agreement defines the relationship among the shareholders, sets out the terms and conditions for shareholding of the company and is not directly related to the investment process itself. The shareholders’ agreement is a contract signed by the shareholders of a company and usually contains details such as the share transfer restrictions, drag-along/tag-along clauses, non-competition clauses, issuance of shares, termination of shareholders agreement and employment matters.
Also called stockholders’ agreement, the shareholders’ agreement is designed to protect the minority or majority of shareholders, depending on the manner of drafting. The purpose of this document is to create a fair relationship among the shareholders. The agreement typically describes in detail the rights and obligations of each shareholders and the legitimate pricing of shares.
One of the differences between share subscription agreement and shareholders agreement is that the shareholders’ agreement is drafted in greater detail. The share subscription agreement is usually simple and straightforward but sometimes it can contain detailed terms about the warranties and indemnification of shareholders.
Contact us or schedule a consultation with your business lawyer in Miami, Florida USA, to help you understand the difference between share subscription agreement and shareholders agreement and assist you their execution.
Malescu Law P.A. – Business Lawyers