To raise capital or to seek new investors, businesses and start-up might require a subscription agreement or a share purchase agreement. Both agreements create a relationship between the investor and the business by granting the investor with shares. However, the two agreements slightly differ in how they work.
A Subscription Agreement
A subscription agreement is usually used to acquire shares in a partnership. The investor is known as the subscriber and the business is the seller. Upon acquiring the shares, the subscriber become a partner in a limited partnership. The agreement sets out the agreed price and amount of shares that the subscriber purchases from the company. The agreement may also set out the time for the allotment of the shares. Under some agreements, the shares and funds may be allocated in ‘tranches’ over a period of time.
Upon the completion of the agreement, the subscriber becomes a limited partner in the business. A limited partner provides capital by the purchase of the shares in the partnership. However, the individual does not actively participate in the operation of the partnership. Thus, limited partners are also known as silent partners. Instead, that is the role of the general partner. General partners determine the candidates for a limited partnership. They also determine the amount of shares and the set the price for those shares. However, due to their influence on the partnership, general partners have a greater liability than a limited partner. The original investment is the liability of the limited partner.
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Other clauses in the agreement include conditions precedent, restraints against competition, and warranties. The conditions precedent set out the acts that must exist before the subscribers becomes a limited partner. The restraints may prevent the subscriber from engaging in an activity that competes with the company. Warranties set out the obligation that each party is willing to oblige with. You can access our complete guide on subscription agreements here. A free template for a subscription agreement is available here.
A Share Purchase Agreement
A share purchase agreement is an agreement where a seller sells his shares to a buyer for a set price. The agreement determines the amount of shares sold, their price, the conditions under which the sale occurs and the covenant’s attached to the shares. The agreement gives both the seller and the purchaser an opportunity to protect their interests before the transfer of the shares.
A share purchase agreement differs from a share subscription agreement because a share purchase agreement has a seller that is not the business itself. In a subscription agreement, the business agrees to sell shares to a subscriber. In a share purchase agreement, the seller may be a major shareholder, a minor shareholder, or small investor who had acquired the shares earlier. The share purchase agreement may also exist between two shareholders. The buyer may already have shares within the company but may wish to increase the shareholding.
Share purchase agreements can be very contentious. Buyers may complain if the target company is not in the condition it was represented to be in by the seller. As a result, many buyers may choose to insert warranties within the agreement. Further, buyers may draft warranties that limit the conduct of the seller after the sale. Post-sale restraints on the seller’s activities are very common in share purchase agreements. The price of the shares may also be a source of negotiation as the buyer or the seller may want to adjust the price based on specific circumstances. For further assistance, you can access our full guide on share purchase agreements here. It is important when purchasing or selling aspect of a business that you seek advice from a business purchase/sale lawyer.
