What is a Share Subscription Agreement?

A share subscription agreement (Share Subscription Agreement) is a promise by a potential shareholder, also known as a subscriber, to make payment of funds to a company (Company) in an agreed number of “tranches”, in return for the Company issuing and allotting a certain number of shares at a certain price, such that the subscriber becomes a shareholder (Shareholder).  A Share Subscription Agreement must include the number of shares that will be issued to the Shareholder, and the order and timing by which funds will be advanced.  Sometimes it seems that a Share Subscription Agreement merely sets out the provisions of a term sheet (Term Sheet) in a fuller and more precise manner. 

Common clauses in Share Subscription Agreements

Share Subscription Agreements can vary greatly depending on the needs of the parties and the types of shares being subscribed for, however, common clauses include:

• conditions precedent – acts which must occur before the Agreement is to come into force, for example, the Subscriber may be required to deliver a consent to be a member to the Company, or the directors of the Company may have to pass certain resolutions to sign the shareholders agreement;
• confidentiality – both parties are usually obliged to keep all confidential information confidential;
• no-shop – obliging the company to limit its search for further capital in a particular fashion;
• restraint against competition – the Subscriber may be restrained from engaging in a business or activity that would be in competition with the business of the Company; and
• tranches – an amount of money to be paid to the Company by the Subscriber in exchange for an agreed amount of shares at a prescribed time; and
• warranty and indemnity – the Subscriber may warrant that they are able and willing to meet their obligations under the Agreement, and may indemnify the Company against stated claims and losses.

Common problems with Share Subscription Agreements

If the details are not sufficiently particularised the Company may be unable to enforce its right to payment of capital.  Obtaining payment in the form prescribed is the most common grievance.

Links and further references

Cases

In Redweaver Investments Ltd v Lawrence Field Ltd (1991) 5 ACSR 438 the NSW Supreme Court held that a provision in a share subscription agreement that required the Defendant to pay the Plaintiff an “indemnity amount” “by way of liquidated damages” in certain circumstances was in substance and effect an unauthorised reduction of the Defendant’s capital.  Therefore, the purported contractual obligation to pay the funds was unenforceable.

Legislation

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

Other links

ASIC Information Sheet 70: Shares

ASIC Regulatory Guide 62: Better disclosure for investors

Further information about raising capital or issuing a Share Subscription Agreement

If you need advice on raising capital or issuing a Share Subscription Agreement, please telephone me for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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