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Difference Between Share Purchase Agreement And A Share Subscription Agreement

A Company aiming to expand its business can do so by raising funds, and for this it may choose to proceed with an Initial Public Offer (IPO) inviting public at large to subscribe to its securities, or may even approach an investor for the same. When a Company chooses to approach an investor, the said investor is most likely to get shares of the Company in return and this is where it becomes crucial to understand nature of Share Subscription Agreement and Share Purchase Agreement.

The above terms at first glance may seem similar and are often confused with. Before beginning any draft, thus, it is very important to analyse and draft accordingly as per the requirement of the Client coupled with the nature of transaction and as Lawyers dealing in the Corporate Sector one may likely be vested with the task of drafting any of the above agreements.

What is a Share Subscription Agreement?

A share subscription agreement is basically an arrangement where the agreement is made between the company and the investor that involves the acquisition of ownership in the company by issuance of new share. Acquisition in a company can either involve purchase of existing securities or issuance of new shares. Acquisition by purchase of securities is termed as "Share Purchase Agreement" and Acquisition by issuance of new shares is termed as "Share Subscription Agreement".

Under Share Subscription Agreement (SSA) the company wants to issue new shares so that the founders do not dilute their ownership in the company. It is basically a promise by a potential shareholder, to make payment of funds to a company, in return Company issuing a certain number of shares at certain price. A share subscription agreement must include the number of shares that shall be issued to the shareholder, and the order and manner in which the funds will be advanced. At times the SSA sets out the provisions of a term sheet in a better manner.

Objective
The core objective of share subscription agreement is to have all the points clear regarding the provision of the SSA and to have clear agreement with the shareholders that necessarily sets out the mechanics of investment which is/are made by the investor into the company. The main purpose of this agreement is to bind both the parties to execute the investment process.

When do you need a subscription agreement?

Although a subscription agreement isn't mandatory, it is a useful document as it will clearly record the terms on which a person (the subscriber) agrees to purchase shares from the company. It can also be an important document to keep for tax purposes. Some subscription agreements are relatively short and informal - for example, where someone is subscribing for shares in their own family's business. More commonly however, and particularly where an arm's length investor is concerned, a more formal subscription agreement is used.

Following are some of the crucial clauses in this Agreement:

  1. Capital Structure:
    This clause lists the Authorized Share Capital of the Company and Paid-Up Share Capital, along with the price at which shares are priced at. It is very much possible that a Purchaser approaches the Company to acquire 100% shares of the Company and in that case, it can result into also transferring the Business to the Purchaser. The Purchaser in this case can thereafter carry the business activities of the Company.
     
  2. Representations and Warranties:
    In this agreement the instant section acts as a guarantee from both the parties wherein the Seller ensures that Agreement is legal, valid and binding. The Seller will also undertake to provide full support and coordination with the Purchaser during the period this whole transaction is in process. Similarly, the Purchaser, may undertake to bear all costs/damages, liability and to bear with taxes accruing to the Seller, Bank Charges, penalties for the time being, in relation to completion of Share transfer process.
     
  3. Indemnity:
    The purchaser shall have to be indemnified against any loss, damages which may arise in the future with respect to some proceedings which could have been concealed by the Company while entering into the Agreement.
     
  4. Confidentiality:
    The confidential information shared between the Parties shall not be disclosed except as may have been decided between the parties. This prohibition shall not apply to the information which is already available in public domain other than from the acts or omissions of the party receiving such information.
     
  5. Governing Law and Dispute Resolution:
    The Agreement must provide about the Law applicable to the Agreement and shall provide for an amicable dispute resolution mechanism, more specifically through arbitration.

Advantages of the share subscription agreement

  1. An SSA is used when the company wants to issue new shares without offering the founder's own shares. Therefore, mostly SSA is mostly used in every stage of the capital-raising process where equity or instruments convertible into equity are used and money is invested into the company.
  2. Share Subscription Agreement is mostly used when the business is at the starting stage where the founders do not wish to dilute their share.
  3. Share Subscription Agreement is a preferred mode of raising funds for start-ups.
  4. With SSA, one can sell the stock without registration with security and Exchange Commission otherwise it is costly and time-consuming.

Disadvantages of the share subscription agreement

  1. There are no voting rights, one has to trust the promoters and directors for its growth.
  2. Invested amount cannot be given back to the investor.

How to draft a Share Subscription Agreement?

  1. Conditions Precedent Clause:
    The Condition Precedent Clause is generally set out by preparing a schedule which contains all the details of the condition to be meted out.
     
  2. Representation and Warranties:
    That the subscriber represents that he has received all the relevant information and all the relevant documents of the company where he is investing. The subscriber can even ask to meet financial commitment and meet their obligations under the agreement. The investor also shall make a specific demand if there is any for what they want to be represented. The warranty clause is very wide as it contains all the information provided by the directors and members of the company is true in every sense and all the information delivered to the investor is correct. This clause can also include the warranty that the company owns license or other IPR.
     
  3. Subscription:
    This clause shall lay don the number of shares purchased and at what price.
     
  4. Term Sheet:
    The inscription laid out in the term sheet is jotted down here to give it the final touch. The terms in the term sheet outline the agreed "conditions" for an investment. The conditions would involve terms like, Investment amount, Pre-money valuation, and Post money valuation
     
  5. Conversion right:
    This right means that there may be a right to convert the shares of preferred stock into the shares of common stock. This right is not mandatory but optional.
     
  6. Drag along with rights:
    Drag along rights mean that the majority shareholders can enforce their decision on the minority shareholders without looking at their interest.
     
  7. Right of First Refusal:
    This clause shall state that at the time when the investor is willing to sell its shares, then the company shall be invited first to purchase the shares and only when the company denies to buy the shares, the investor shall sell such share to outsiders.
     
  8. Duration of the Stake:
    Minimum duration of the stake to be held by the investor.
     
  9. Exit Rights:
    This clause shall state the exit right in case of breach of terms and conditions.
     
  10. Indemnity:
    Any of the party will indemnify the other party against any losses, claims, costs, liabilities, damages occurred if any party is in breach or damages occurred because of inaccurate information in the warranties and representation clause .it is a bit time taking process and costly
     
  11. Termination:
    By the mutual consent of both the parties.
     
  12. 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.
     
  13. 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.
     
  14. Any party willing to terminate the agreement on the ground of the clauses mentioned above shall issue a notice to the other party.
     
  15. Compromise with creditors
     
  16. Event of default:
    the agreement can be terminated with an event of default by the consent of the parties.
     
  17. Insolvency:
    if the company becomes bankrupt then the agreement shall be terminated.
     
  18. Governing Law and Jurisdiction:
    The Agreement shall be governed by all the appliable the Indian law.
     
  19. Dispute Resolution:
    In the event of a dispute arising between the parties with regards to the interpretation of this agreement or any default or breach by any of the party, such matter or matters in dispute shall be finally settled by way of Arbitration:
    -a. Under [the Rules of Conciliation and Arbitration of the International Chamber of Commerce];b. there shall be appointed a minimum three arbitrators, minimum one should be appointed by each Party, one shall be the chairman, selected by the other appointed arbitrators and failing agreement by the [Chairman of the International Chamber of Commerce]; c. the language of the arbitration shall be English; d. the place of the arbitration shall be the place of business;
     
  20. Stamp Duty:
    It varies from state to state
  21. Miscellaneous:
    Amendments and Waivers:
    It is hereby agreed that during the term of this agreement none of the terms shall be deemed to have been waived by an act of the parties.

    Severability:
    It is hereby agreed that if any provision under this agreement is held to be invalid, unenforceable and illegal, then, in any way that provision shall not affect any other provision thereof.

    Entire Agreement:
    This ��� Agreement dated ��� between ����. and ����. constitutes the entire agreement and understanding of the parties with regards to subject matter and supersedes any prior negotiations or agreements between the two parties to the subject matter hereof.

What is a Share Purchase Agreement?

A share purchase agreement is defined as a legal contract between a seller and a buyer. They may be referred to as the vendor and purchaser in the contract. The specific number of shares are listed in the contract at the stated price. This agreement proves that the sale and the terms of it were agreed upon mutually.

Contents of a Share Purchase Agreement

The agreement contains all the terms and conditions that are finalised when it comes to the sale and purchase of the shares of the company.
The following are listed in a share purchase agreement:
  1. Name of the company
  2. Par value of shares
  3. Name of purchaser
  4. Warranties and representations made by seller and purchaser
  5. Employee benefits and bonuses
  6. Number of shares being sold
  7. Details of the transaction
  8. Indemnification agreement for unforeseen costs

Before the finalisation of the agreement, a letter of intent will be formed. The buyer must perform due diligence to ensure that the purchase agreement and the letter of intent have the same terms. The seller must pay close attention to the sale and purchase section and the warranties and representations section.

The terms of sale and purchase should be the same as the letter of intent. Any discrepancies can result from buyer due diligence and need to be negotiated before the share purchase agreement is complete.

The warranties and representations need to be checked to make sure that there are no false statements. If this takes place and is discovered later, there could be legal action and recourse. There might be some purchase price adjustment that the seller has to reimburse in case of any misrepresentations.

Circumstances that warrant a Share Purchase Agreement

When a corporation or individual purchases or sells shares in another corporation or business, a share purchase agreement must be entered. For instance, in a partnership with two partners, if one partner quits the business, the other partner can acquire the shares by using a share purchase agreement.

Use of share purchase agreement?

The share purchase agreement is used when an organization or an individual is purchasing or selling the shares in the company with another person or organization.

Example: if there is a partnership, 'an assignment of partnership interest' can be used or in one case, if there are two partners and both the partners have equal shares and one of the partners decides to leave the partnership, a share purchase agreement can be used to buy the stock of the business.

Kind of information and types of shares in the share purchase agreement

Generally, the information which a share purchase agreement holds such as the company's information, seller and purchaser of shares, dispute resolution clause, termination, kind of shares being sold, number of shares being sold, price of the shares being sold and payment details.

There are two types of shares:

Voting shares and non-voting shares. Voting shares give the privilege to have an opinion on the board of director's decision and a voice on policy making whereas non-voting shareholders do not have the privilege to vote on board of directors and policy formulation.

Reasons for using share purchase agreement
  1. It's a binding document.
  2. More possibility of an increase in revenue via business.
  3. Seller and purchaser can take the final call before the signature is done.
  4. Tax benefit.

Reasons for not using share purchase agreement
This is the rarest occasion when share purchase agreement can not be used because it protects all the parties involved in it:
  1. There is only one shareholder in the organisation.
  2. Offers a limited capacity for regulation.

Essential clauses that need to be covered in the share purchase agreement

Some classic clauses are:
  1. Parties:
    parties to the agreement are the prominent factor for any contract. In share purchase agreement the seller and the purchaser are the parties to the agreement. Sometimes the company is just incorporated for a share purchase agreement or any shell company with no financial backtrack record. In these cases generally, a guarantor is appointed for the claims post and promises made in the agreement.
  2. Recitals:
    the factual background and objectives of the transaction and the role of each party should be clearly stated in the recitals.
  3. Definitions and interpretations:
    definitions of the words stated in the agreement should be defined as to what it means regarding its use in the agreement and the clauses should be interpreted in the same way as the definition of the words and phrases are stated. Ideally, a definition should be limited to the meaning of the term.
  4. Considerations and sale of shares:
    payment structure should be stated in an elaborative way. About the sum that is payable on closing, deposits to be given at the time of execution, the amount to be set off at the time of breach of the indemnity amount or warranties. The payment will be paid in tranches or one-time full-fledge payment or when it will be triggered. All these minor details that should be explicitly stated in consideration terms.
  5. Condition precedent:
    this clause should explicitly state about each of the people who is responsible for the authorisation, permissions and permits. This clause should also cover the representations, warranties, obligations and execution of the agreement.
  6. Closing:
    this clause should include all the details even the minors ones including the time, place and manner in which closing shall take place.
  7. Condition subsequent:
    in rarest case there would be a need for this clause because in share purchase agreement it becomes needless. In case of breach of a condition, a subsequent purchaser should be a safeguard.
  8. Covenant by the parties:
    it is accommodated to provide a level of comfort to parties. It is required from the seller regarding the management of the company.
  9. Seller's representations and warranties:
    vendor's representation as to the number of shares owned by them and the list of the director's. Other affirmative information provided by the seller such as accounts transparency, pending dispute, loan information. Therefore the clause should be open about the vendor's right to sell their share to the purchaser.
  10. Purchaser's representations and warranties:
    it is generally a repeating clause to safeguard the interest of the parties.
  11. Confidentiality:
    it is one of the premium clauses of the share purchase agreement. At this stage, parties have shared the confidential information of the company so this clause helps in sealing the information and it can not be revealed without the consent of both the parties. Confidential clauses are generally kept time-barred from 18 months to two years.
  12. Indemnification:
    this clause deals with the claim amount, procedure, time limit and the subject matter.
  13. Notice:
    several points that must be there in this are the location of the parties where the notice will be dispatched, in which form like electronic or other and the format of acceptance must be disclosed.
  14. Force majeure:
    this type of clause is put for unforeseen crises and strengthens the parties in the share purchase agreement. It is regarding the fluctuating market and financial crisis.
  15. Resolution of dispute and arbitration:
    arbitration is not so popular in India but as the supreme court ruled that if both parties are Indian then they can choose to have a seat in India and if one party is an outsider then they may have a seat outside India. This clause should be explicit on the procedural law, the seat of arbitration language, number of arbitrators.
  16. Jurisdiction and general clause:
    Indian laws will be applicable. The city of the buyer's court will have jurisdiction.
  17. Termination:
    the clause should clearly specify how the agreement can be terminated.

Advantages and disadvantages of the share purchase agreement

Some of the advantages are-Share purchase agreement facilitates transfer with economical ease.It eliminates the requirement of consent from the creditors.

Some of the disadvantages are-The buyer acquires all the assets and assumes and liabilities including rights and obligations. It is vitally important for the buyer to exercise due diligence to identify previously hidden liabilities, disputes, ownership of assets etc.

Difference between Share Subscription Agreement and Share Purchase Agreement

The major difference between a Share purchase agreement and a share subscription agreement is that in a Share purchase agreement the consideration is credited into the account of the seller of the share (who is generally an investor or promoter of the company) who wants to sell his stake in the company.

Whereas in the case of Share subscription agreement the consideration paid by the buyer of the shares is credited in the account of the Company as the company issues additional shares at a predetermined price. A Share Purchase Agreement is a faster method to acquire the stake in the company as compared to the Share Subscription Agreement.

The share Purchase agreement also does not lead to the dilution of the stake of the existing shareholders of the company. Before this agreement is given effect, it is very important that the outgoing partner has got the written consent of the company or the outgoing.

Conclusion
From the above paragraph, it can be concluded that each agreement entered between shareholders and the company is entered into to protect the interest of investor as well as the company. There are advantages as well as disadvantages of each agreement.

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 order to have legal validity of all these agreements, it is always advisable that all these agreements should be stamped and notarized.

Award Winning Article Is Written By: Ms.Ria Rajesh Khandelwal
Awarded certificate of Excellence
Authentication No: AR210143474852-11-0422

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