INTRODUCTION
In 2022, Tube Investment of India (TII) witnessed a boost in its share value by approximately 5% following the announcement of the Share Subscription Agreement (SSA) (see here). The agreement entails TII acquiring a 50% ownership stake in the company through a partnership with X2Fuels.
A good drafted SSA formalizes the terms and conditions of the subscription of new shares in a company and sets out the agreement between the company and the subscriber regarding the issuance and purchase of shares. The main objective of an SSA is to establish a legally binding contract that governs the process of subscribing for new shares and protects the rights and interests of both the company and the subscriber. It outlines key details such as the number of shares to be subscribed, the subscription price, payment terms, any specific rights or restrictions attached to the subscribed shares, and the obligations of both parties. The share subscription agreement ensures transparency, clarity, and enforceability in the process of subscribing for new shares, providing confidence and protection to both the company and the subscriber.
A Shareholders Agreement is a contract between the shareholders of a company, a Share Purchase Agreement is a contract between a buyer and a seller for the purchase and sale of existing shares in a company, and a Share Subscription Agreement is a contract between a company and an investor or subscriber for the issuance of newly issued shares or securities.
Team Your Legal Career Coach (YLCC) provides an understanding of the key elements of a Share Subscription Agreement for Issuing Shares and the best practices for Drafting a Share Subscription Agreement!
THE ESSENTIAL ELEMENTS OF A SHARE SUBSCRIPTION AGREEMENT
Condition Precedent Clause
This clause outlines specific conditions that must be met by both parties involved in the transaction before they can exercise their respective rights and proceed with the share subscription.
One of the key purposes of this clause is to ensure that thorough due diligence is conducted by the investor before investing. The investor will typically review and assess various aspects of the company in which they are investing to gain a clear understanding of its financial health, operations, legal compliance, and potential risks. This due diligence process helps the investor make an informed decision and mitigates the risk of unforeseen issues or challenges arising after the investment. The conditions precedent specified in the agreement is typically the result of this due diligence process. They may include, but are not limited to, the following:
- The parties must finalize and complete all necessary legal documentation required for the share subscription transaction to be consummated. This ensures that all contractual obligations and rights are properly documented and legally binding.
- The company seeking investment must obtain all necessary approvals and consents from relevant parties and authorities. This may include approvals from government agencies, regulatory bodies, creditors, shareholders, or other third parties. These approvals ensure compliance with applicable laws and regulations and validate the legitimacy and feasibility of the investment.
- The investor may require the company to provide evidence of financial and legal clearances, such as tax compliance certificates, audit reports, regulatory filings, or licenses. These clearances assure the investor that the company is in good standing and has met its financial and legal obligations.
- The parties must ensure that any specific conditions or requirements agreed upon during negotiations are fulfilled. These conditions may include performance milestones, restructuring obligations, or any other specific terms that the parties have agreed to as part of the share subscription agreement.
It is important to note that the fulfilment of these conditions precedents is crucial for the investor’s commitment to invest in the company. If any of the conditions are not met within the specified timeframe or as agreed upon, the investor may have the right to terminate the agreement or renegotiate the terms.
Share Transfer Clause
This clause is an important provision within a share subscription agreement that governs the ability of investors to transfer their shares to third parties and outlines the conditions, restrictions, and procedures associated with transferring ownership of the subscribed shares.
Some key points:
- The clause may include restrictions on the transfer of investor shares to ensure control, stability, or compliance with regulatory requirements. Common restrictions may include obtaining prior consent from the company or other shareholders, right of first refusal (ROFR), or restrictions on transferring shares to competitors.
- A ROFR provision grants existing shareholders or the company the right to purchase the shares being transferred before they can be offered to third parties. This allows shareholders or the company to maintain control and prevent unwanted shareholders from entering the company.
- The clause may outline the process for obtaining approvals or consents required for transferring shares. This may involve notifying the company or other shareholders of the intention to transfer, providing necessary documentation, and obtaining their approval or waiver of any rights they may have.
- The agreement may include provisions that restrict the timing or frequency of share transfers. For example, it may specify a lock-up period during which the investor is prohibited from transferring their shares, often to ensure stability and commitment to the company’s long-term goals.
- The clause may require compliance with applicable securities laws and regulations governing the transfer of shares.
- The clause may outline certain circumstances under which transfers are permitted without the need for additional approvals or restrictions. For example, transfers to family members, affiliates, or entities under common control may be exempted from certain transfer restrictions.
- The clause may specify who bears the costs associated with the transfer process, such as legal fees or administrative expenses. It may also outline any obligations of the transferring party, such as providing representations and warranties regarding the shares being transferred.
Representations & Warranties Clause
This clause is also known as the Assurances and Declarations clause and is a significant component as it outlines the statements, assurances, and guarantees made by the parties involved in the agreement regarding various aspects of the transaction and the company’s current state. It serves to establish the accuracy, completeness, and reliability of the information provided by each party, reducing the risk of misunderstandings or misrepresentations.
Some key points:
- The representations are statements of fact made by one party to the other, which can include details about the company’s ownership, capitalization, financial condition, assets, liabilities, operations, intellectual property, contracts, legal compliance, and other relevant matters. These statements are intended to provide a comprehensive and accurate picture of the company’s affairs.
- The warranties are legally binding assurances provided by one party to the other regarding the truthfulness and accuracy of the representations made. They offer additional protection to the receiving party by guaranteeing that the statements made are true, complete, and not misleading.
- The representations and warranties clause is essential for both parties involved. For the investor, it ensures that the information provided by the company is reliable and can be relied upon when making investment decisions. It helps protect the investor from any potential hidden risks or undisclosed liabilities associated with the company. On the other hand, for the company, it acts as a means to demonstrate its transparency, credibility, and commitment to providing accurate information and helps build trust with the investor and safeguards the company from claims or disputes arising from inaccurate or incomplete disclosures.
Pre-emption Right of Investors Clause
This provision is included in a shareholders’ agreement or share subscription agreement that grants existing investors or shareholders the right to maintain their proportional ownership in the company by having the first opportunity to subscribe or purchase additional shares in the event of a new share issuance. The purpose of this clause is to protect the interests of the existing investors and ensure that they have the opportunity to maintain their ownership percentage in the company when new shares are being issued. It gives them the right, but not the obligation, to participate in any new equity offering on a pro-rata basis before the shares are offered to external investors or third parties.
Key points to remember:
- The clause typically specifies that the company must provide written notice to existing investors about the proposed issuance of new shares. The notice will outline the details of the offering, including the number of shares, the price, and the timeline for exercising the pre-emption rights.
- The clause will specify a specific period within which existing investors can exercise their pre-emption rights. This period is usually limited to ensure timely decision-making and efficient capital raising for the company.
- The clause ensures that existing investors have the opportunity to purchase additional shares in proportion to their existing ownership percentage. This allows them to maintain their relative ownership stake and avoid dilution.
- The clause may impose restrictions on the transferability of the pre-emption rights, such as limiting the ability of existing investors to transfer or assign their rights to third parties.
- If existing investors choose not to exercise their pre-emption rights within the specified period, the clause may permit the company to offer the remaining shares to external investors or third parties.
- The Pre-emption Right of Investors Clause helps safeguard the interests of existing investors by providing them with the opportunity to participate in future equity issuances, thereby maintaining their ownership and influence in the company.
CONCLUSION
A Share Subscription Agreement (SSA) is a crucial legal document that formalizes the terms and conditions of subscribing for new shares in a company and establishes a legally binding contract between the company and the subscriber, outlining key details such as the number of shares, subscription price, payment terms, rights and restrictions attached to the subscribed shares, and the obligations of both parties. The SSA plays a significant role in ensuring transparency, clarity, and enforceability in the share subscription process and protects the rights and interests of both the company and the subscriber by providing a framework for conducting due diligence, establishing conditions precedent that must be met before proceeding with the transaction, and setting guidelines for the transfer of shares.
Disclaimer: This article is for information purposes only. You are advised to consult a legal professional for drafting such crucial documents for your business.
This article has been written by Team YLCC. For any other queries, reach out to us at: queries.ylcc@gmail.com
