Malcolm ZoppiSun Oct 15 2023

Share Purchase Agreement vs Share Subscription Agreement: Key Differences Explained

Navigate the world of business transactions by understanding the key differences between these two crucial tools.

Share Purchase Agreement vs Share Subscription Agreement: Key Differences Explained

Share Purchase Agreement vs Share Subscription Agreement

In the world of business transactions, share purchase agreements and share subscription agreements are essential tools used to facilitate the transfer and issuance of shares in a company. Understanding the distinction between these two agreements is crucial for both investors and business owners, as they have different implications, terms, and structures.

A share purchase agreement details the terms of a transaction in which the shares of a company are being bought by an investor directly from an existing shareholder. Here, the seller is not the business itself. On the other hand, a share subscription agreement is a contract between the company and an investor, wherein the investor subscribes to purchase shares in the company and the company agrees to issue them. This means that there will be additional shares being paid up share capital issued, resulting in the dilution of ownership for existing shareholders.

Key Takeaways

  • Share purchase agreements involve transactions between an investor and an existing shareholder, while share subscription agreements involve an investor and the company directly.
  • A share subscription agreement leads to the issuance of new shares, resulting in a potential dilution of ownership for existing shareholders.
  • Both agreements serve different purposes, and understanding their key characteristics is essential for informed decision-making in share transactions.

Understanding the Basics

Definition of Share Purchase Agreement

A Share Purchase Agreement (SPA) is a contract used in the private sale of shares. This legal document sets out the deal terms in writing, specifying any conditions to the sale, such as obtaining regulatory consents, raising funds, allocating risk, and protecting the buyer by limiting the seller’s ability to establish a competing business. As an investor, you would typically enter into an SPA if you were purchasing shares from an existing shareholder, potentially gaining a substantial or controlling interest in a company.

Using an SPA as a buyer, you can benefit from warranties and indemnities, which are guarantees relating to various aspects of the company, such as the accuracy of financial statements, the authority to sell shares, and the disclosure of relevant information. SPA’s often include restrictive covenants, which are provisions that limit the seller’s activities post-sale to protect your investment. As a buyer or seller of shares, a well-drafted SPA ensures your rights and obligations are clearly outlined to avoid disputes and facilitate completion.

Definition of Share Subscription Agreement

Share Subscription Agreements (SSA) differ from SPAs in that they are used when new shares are being issued by a company to an existing investor only, rather than purchasing existing shares from another shareholder. As a prospective investor, you would complete an SSA as a step to becoming a partner or acquiring a shareholding in a business. With all these agreements, both parties make guarantees: the subscriber (investor) agrees to purchase shares at a set price, while the company promises to issue the shares.

An SSA outlines the detailed terms of your investment, including share prices, payment terms, and conditions precedent, such as fulfilling specific legal or regulatory requirements. Entering into such an agreement or SSA benefits you as an investor by guaranteeing the issuance of shares by the company, while the company benefits from securing an investor’s commitment to the investment.

In summary, Share Purchase Agreements and Share Subscription Agreements serve different purposes within the context of investments and share transactions. It’s essential that you, as an investor, understand the distinctions and choose the appropriate share purchase agreement differs you to suit your circumstances when acquiring shares in a company.

Key Characteristics

Characteristics of Share Purchase Agreement

A Share Purchase Agreement (SPA) is a legal contract between a buyer and a seller for the purchase and sale of existing shares in a company. The SPA lays out the terms and conditions for the entire agreement and the transfer of ownership, ensuring that both parties understand their rights and obligations.

  • Shares: In an SPA, the shares being bought and sold already exist, and their ownership is transferred from the seller to the buyer.
  • Investment: The buyer acquires an interest in the company by purchasing the shares from the existing shareholder(s).
  • Investors: A buyer in an SPA can be an individual, a company, or even an investment fund.
  • Confidentiality: Confidentiality provisions in an SPA protect sensitive company information, ensuring that the buyer uses it only for the intended purpose.
  • Ownership: Upon completion of an SPA, the buyer becomes the new shareholder, acquiring the rights and obligations associated with the purchased shares.
  • Market: An SPA can involve the transfer of shares in a private or publicly traded company, provided the shares are not listed on a stock exchange.
  • Template: Legal professionals often use SPA templates as a starting point, tailoring clauses to suit the specific deal and parties involved.

Characteristics of Share Subscription Agreement

A Share Subscription Agreement (SSA) is a legal contract between a company and an investor (subscriber) for the issuance and subscription of new shares in the company. The SSA sets out the terms under which the investor agrees to the authorized share capital and subscribe for the shares, providing the company with fresh capital.

  • Shares: In an SSA, the company issues new shares to the subscriber, effectively expanding the share capital of the company.
  • Investment: The subscriber invests in the company by purchasing newly issued shares, directly contributing capital to the company.
  • Investors: Subscribers in an SSA are often individual or institutional investors looking to back promising businesses, particularly start-ups.
  • Confidentiality: As with an SPA, SSAs often include provisions to protect sensitive company information, ensuring it is used only for the intended purpose.
  • Ownership: Upon the completion of an SSA, the investor becomes a shareholder in the company, acquiring the relevant rights and obligations.
  • Market: SSAs typically involve private companies seeking growth capital, though public companies can also issue shares through private placements.
  • Template: Similar to SPAs, legal professionals frequently rely on SSA templates while customising agreements to suit the specifics of the company and investor involved.

Legal Aspects

Legal Requirements for Share Purchase Agreement

A share purchase agreement (SPA) is a contract between a seller and a buyer that outlines the terms and conditions governing law out of selling shares in a private limited company. In the UK, it is essential to engage a lawyer to ensure compliance with corporate law.

The legal aspects of a share purchase agreement include conditions precedent, which are specific requirements that must be met before completion. These may involve the due diligence process, where the buyer examines the target company’s legal, financial, and operational aspects to identify any risks or potential concerns.

During the negotiation of the SPA, parties should seek legal advice to ensure that all necessary representations, warranties, and indemnities are included in shareholders agreement. These protect the buyer against any undisclosed liabilities and provide recourse against the seller if any breaches of the agreement occur.

It is vital to address restrictions and restraints against competition in the share purchase agreement, which may involve non-compete clauses or non-solicitation provisions.

Legal Requirements for Share Subscription Agreement

A share subscription agreement is a contract between an investor and a company aiming a business in which the investor agrees to subscribe for the company’s shares in return for capital. In the UK, corporate law requires that specific legal aspects be considered in a share subscription agreement, and engaging a lawyer is necessary to ensure compliance.

Like in a share purchase agreement, the conditions precedent must be the same information specified in the share subscription agreement, such as the satisfactory completion of due diligence on the investor’s part.

Your lawyer should advise you on incorporating representations, warranties, and indemnities from the business to protect the investor’s interests and provide remedies in case of any breaches.

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Following UK corporate law, certain restrictions may need to be included in the share subscription agreement, such as transfer restrictions on the shares, pre-emption rights for existing shareholders, and specific rights or obligations tied to the investor’s shareholding.

In summary, it is crucial to involve a lawyer when drafting and negotiating share purchase and share subscription agreements to ensure that the legal aspects are taken into consideration, including conditions precedent, the completion date, and safeguards for both parties.

Warranties and Indemnities

When entering into a share purchase agreement (SPA) or a share subscription agreement, it’s essential for both the buyer and the seller to understand the roles of warranties and indemnities in the transaction. Warranties and indemnities are important aspects of these agreements, used to allocate risk and facilitate a smooth and secure transaction.

Warranties are contractual assurances given by the seller to the buyer regarding specific aspects of the target company, such as the company’s financial state, assets, liabilities, and operations. They provide a mechanism for the buyer to obtain financial compensation if any of the statements made by the seller turn out to be inaccurate. This essentially acts as a guarantee from the seller, providing a level of protection for the buyer in case of any breach of warranty.

Indemnities, on the other hand, are contractual commitments made by the seller to compensate both the parties and buyer for specific losses or liabilities arising from particular circumstances. Unlike warranties, indemnities do not require the buyer to prove that the company’s value has been reduced as a result of the liability. This places the risk of the liability arising entirely with the seller, thus providing additional protection against legal fees for both the parties and buyer.

In a SPA, both warranties and indemnities are usually included, as they serve different purposes and provide varying levels of protection to the buyer. Warranties are often broad in scope, covering a range of issues such as financial statements, taxes, and regulatory compliance. Indemnities, on the other hand, tend to be tailored to specific risks or liabilities, such as potential litigation or environmental issues.

In a share subscription agreement, warranties and indemnities may also be included, but the focus might be different from above agreements since the buyer is subscribing for newly issued shares rather than purchasing existing shares from a seller. The warranties might focus on aspects such as the issuer’s authority to issue the shares and the accuracy of the information provided in the subscription documents. Indemnities might be more limited in scope, as there is typically no existing shareholder selling shares and seeking to limit their liabilities.

It’s crucial for both parties to carefully review and negotiate the warranties and indemnities in a SPA or share subscription agreement to ensure that their respective interests are adequately protected. By understanding and appreciating the functions of warranties and indemnities, you can ensure that you are entering into a well-structured and risk-appropriate transaction.

Roles and Responsibilities

Roles in Share Purchase Agreement

In a share purchase agreement (SPA), various parties assume specific roles and responsibilities to ensure a successful transaction. The company being acquired plays a crucial role as it provides the required information and documentation for due diligence. The shareholders of the company being purchased are responsible for selling their shares and warranting the accuracy of the company’s statements and representations.

Investors or buyers, on the other hand, have the responsibility to carry out due diligence and negotiate the terms of the SPA, including warranties, indemnities, and other provisions that protect their interests. They must make sure the agreement is fair and protect their investment.

In cases where a partnership is involved, the roles and responsibilities vary depending on the type of partner:

  • The limited partner typically contributes capital and has limited liability, but has minimal control over the management of the partnership’s affairs.
  • The general partner has more control over the partnership, but also bears more liability for its obligations and debts.
  • The silent partner usually invests capital but does not actively participate in the partnership’s management and decision-making process.

Roles in Share Subscription Agreement

In a share subscription agreement, the roles and responsibilities are different from those in an SPA. The main parties involved are the issuer (the company) and the investors or subscribers.

The company is responsible for providing accurate and complete information to the investor, including the terms of the subscription, the rights attached to the shares, and any relevant disclosures. The company must also comply with applicable regulations and requirements.

The investor or subscriber, on the other hand, said investor, has the responsibility of carefully reviewing the subscription agreement and assessing the risks, opportunities, and fairness of the terms offered by the issuer. They must make sure this investment aligns with their interests and objectives.

In instances where a partnership is involved in a share subscription agreement, the roles and responsibilities are similar to those in an SPA. The general partner would actively raise money and participate in the management of the partnership, the limited partner would typically contribute capital with limited liability, and the silent partner would invest without actively participating in the partnership’s management decision-making process.

Transaction Process

Transaction Process of Share Purchase Agreement

In a Share Purchase Agreement (SPA), the transaction process typically begins with the buyer and seller entering into negotiations to determine the price, terms, and conditions of the sale of shares. During this stage, extensive due diligence often is carried out to ensure that the buyer has all the necessary information regarding the target company. This might involve reviewing the financial statements, contracts, and legal compliance of the company.

Once the negotiations are complete, the parties will draft the SPA, which will outline the agreed-upon terms of mutual agreement, including the price, number of shares to be sold, and any warranties and indemnities that the seller will provide. The buyer will also review the representations and warranties of the seller to minimize their potential exposure to undisclosed liabilities.

After the SPA has been executed, the transaction moves towards completion. Both parties work together to satisfy any conditions precedent, obtain regulatory approvals if required law applicable,, and finalise ancillary documents related to the acquisition. Finally, the completion stage occurs when the shares are legally transferred to the buyer, and the purchase price is paid to the seller.

Transaction Process of Share Subscription Agreement

In a Share Subscription Agreement (SSA), the transaction process is slightly different. The investor and the company whose shares are being subscribed for will start with negotiations to get shareholders agreement and establish the price, terms, and conditions of the subscription. The investor might also perform due diligence to evaluate the company’s financial health and future growth potential.

Once the parties have agreed on the terms of the investment, they will enter into a Share Subscription Agreement. This document will set out the details of the transaction, such as the price, number of shares to be subscribed for, and any representations and warranties provided by one party to the company.

Before the completion stage, any necessary approvals will be obtained, and any conditions precedent will be satisfied. Upon completion, the company chooses the investor will typically provide the company with the agreed-upon funds, and the company wishes newly issued shares will be allotted to said investor and registered in the investor’s name.

Risks and Considerations

When evaluating a share purchase agreement (SPA) and a share subscription agreement (SSA) as potential investment opportunities, it is important to consider various risks and points of considerations.

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With an SPA, you, as the buyer, acquire shares from existing minority shareholders, of a company. This means that you essentially step into the shoes of the selling shareholders, taking on their liabilities and ownership in the target company. A key concern with SPAs revolves around warranties and indemnities, which protect you from any potential unknown risks or liabilities. It is essential to conduct thorough due diligence to identify potential issues associated with the target company, addressing them within the agreement.

In an SSA, you subscribe for new shares being issued by the company, resulting in limited liability compared to an SPA. Your risk exposure is primarily restricted to the amount of the subscription, shielding you from the amount even a company’s past liabilities and obligations. While this may seem like a more cost-effective option, you should still be cautious about the warranties provided by the issuer to mitigate any undisclosed risks associated with the business.

One crucial factor to consider in both SPAs and SSAs is the inclusion of restrictive covenants. These provisions prevent the selling shareholders or issuers from engaging in unfair competition or divulging sensitive information that may put your investment at risk. The enforceability and scope of these covenants should be carefully analysed to ensure they adequately protect your interests.

Finally, be aware of the tax implications of both SPAs and SSAs. Each type of agreement may have differing tax consequences depending on several factors, such as your jurisdiction, the target company’s capital structure itself, and the nature of the transaction. Engage professional tax advisors to help you navigate these complexities and structure your own investment agreements in the most tax-efficient manner possible.

Practical Guidance

Choosing Between Share Purchase and Subscription Agreement

When deciding between a share purchase agreement (SPA) and a share subscription agreement, consider the nature of the transaction and your objectives. In a SPA, you buy existing shares from current shareholders of the target company. This typically involves transferring control and ownership of the business. On the other hand, a share subscription agreement involves the issuance of new shares by the target company to investors, which often aims to raise funds for growth or investment purposes.

Preparing for a Deal

Before entering into a share purchase or subscription agreement, it’s crucial to conduct thorough due diligence, either as a buyer or an investor. The due diligence process allows you to gather essential information about the target company, identify potential risks, and evaluate the company’s market position. Key areas to examine include financials, legal and regulatory compliance, commercial operations, and intellectual property.

For a share purchase agreement, particular attention should be given to:

  • Conditions precedent: These are conditions that must be satisfied before completion of the transaction, such as obtaining regulatory approvals.
  • Purchase price: This should reflect a fair valuation of the company and be adjusted according to any issues identified during the due diligence process.
  • Warranties and indemnities: These protect the buyer against potential losses arising from undisclosed liabilities or misrepresentations about the company.
  • Restrictive covenants: These may prevent sellers from competing with the company post-completion, which can help protect the buyer’s interests.

In the case of a share subscription agreement, focus on:

  • Investment terms: Determine the rights and obligations of both the investor and the issuing company, such as voting rights, dividend entitlements, and pre-emption rights.
  • Valuation and pricing: Agree on the price per share, reflecting the risk profile, growth potential, and market position of the business.
  • Representations and warranties: Ensure that the company provides accurate information about its financial position, operations, and compliance to protect your investment.
  • Covenants: These may set out ongoing obligations of the company, such as reporting requirements, restrictions on borrowing, or divestments.

Seeking Legal Advice

Given the complexity of share purchase and subscription agreements, it’s highly recommended to seek professional legal advice to protect your interests and ensure that the transaction is properly structured. Engaging a lawyer with expertise in these types of agreements can help identify and address potential issues, assist in the negotiation process, and draft the necessary documents. By considering this legal advice plan, you can mitigate the risks associated with the deal and enhance the likelihood of a successful outcome.

Frequently Asked Questions

What are the key differences between share purchase and share subscription?

A share transfer process or purchase agreement involves the sale of existing shares from a current shareholder to a buyer, whereas a share subscription agreement is about the issue of new shares from a company to an investor. Share purchase agreements involve the transfer of ownership of shares, whereas share subscription agreements create new shares and increase the total shares in the company.

When should one opt for a share purchase agreement or a share subscription agreement?

You should opt for a share purchase agreement if you’re looking to acquire a stake in a company by purchasing existing shares from a current shareholder. This can be useful for buying a controlling interest in an existing business or for existing minority shareholders about to exit the part even a company either. On the other hand, a share subscription agreement is suitable when you’re raising capital by issuing new shares to investors. This method can bring in fresh funds into the company for growth and expansion.

How do share purchase and subscription agreements affect shareholder rights?

In a share purchase agreement, the buyer acquires the rights, benefits, and obligations attached to the purchased shares, including voting rights and dividend entitlements. The buyer also takes on any restrictions and liabilities that come with the shares. In a share subscription agreement, the new shareholder receives the rights, benefits, and obligations applicable to the new shares as specified in the agreement. The existing shareholders may have their rights diluted or affected due to the issuance of new shares, depending on their proportion of ownership.

What are the main negotiation points in a share purchase versus share subscription agreement?

In a share purchase agreement, key negotiation points include the purchase price, terms of payment, warranties, indemnities, and closing conditions. The parties also need to consider outstanding liabilities and any restrictive covenants that might affect the shares. In a share subscription agreement, the focus is on the subscription price, the terms of the issue, investor rights, conditions precedent, and the company’s ongoing obligations to the new shareholder.

How are tax implications different for share purchase and share subscription agreements?

The tax implications for share purchase agreements depend on factors such as the taxable gain realised by the seller and the related tax treatment for the buyer. In certain cases, a share purchase may allow for the transfer of tax reliefs and losses. Share subscription agreements, on the other hand, generally do not result in tax liabilities for the existing shareholders. However, the company may be subject to taxes on the funds raised through the formal subscription agreement, and the new investor may have tax implications based on their individual circumstances.

Which agreement is more appropriate for a startup: share purchase or share subscription?

For startups looking to raise capital for growth and expansion, a share subscription agreement is generally more appropriate. This allows the company to issue new shares to investors, resulting in an infusion of funds into the business. Share purchase agreements may be less suitable for startups as they involve the transfer of existing shares and would not directly bring new funds into the company.

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Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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