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When a company is raising capital, they may require a number of different legal documents as part of the investment transaction. Investors will be interested in a company’s shareholders agreement because it is one of the key governance documents for the company. However, a shareholders agreement is different from an investment agreement and will not itself be sufficient in documenting the terms of an investment. This article explains:

  • what investment agreements are;
  • what shareholders agreements are; and
  • the key differences between these two types of documents.

What Are Investment Agreements?

An investment agreement is a contract entered into between a company and an investor. This document sets out the terms and conditions of the investment transaction. It is very important to have an investment agreement because it covers the key terms of the investment, including:

  • the details of the company and the investor;
  • how much is being invested;
  • any conditions of the investment;
  • the actions each party is obliged to take in order to complete the investment (for example in an equity investment, the company’s obligation to issue shares to the investor, and the investor’s obligation to transfer funds to the company); and
  • the company gives warranties and representations to the investor, and by the investor to the company.

Types of Investment Agreements

The type of investment agreement you will need will depend on the nature of the transaction. The table below sets out different types of investment transactions and the associated investment agreement.

Type of Investment Relevant Investment Agreements
Equity Investment

Share Subscription Agreement

A share subscription agreement will state that the investor will subscribe for shares in the company in exchange for an agreed investment amount. Then, the company will issue those agreed shares to the investor.

SAFE 

SAFE (‘simple agreement for future equity’)

A SAFE will state that the investor will provide certain funds to the company. In exchange, they have the right to receive shares in the company if certain trigger events occur.

Convertible Note

Convertible Note Deed Poll

The company signs a convertible note deed poll. It sets out the terms and conditions on which the company issues convertible notes.

Convertible Note Subscription Agreement

Under a convertible note subscription agreement, the investor will subscribe for convertible notes in exchange for an agreed investment amount. The issue of the convertible notes is governed by the terms of the convertible note deed poll.

Venture Debt

Loan Agreement

A loan agreement will set out the terms of the loan from the investor. This includes the:

  • amount the investor is lending;
  • term of the loan; and
  • repayment conditions.

Security Agreement

An investor will generally require the company to grant them security over the company’s assets. The terms of the security granted will be set out in a security agreement.

Warrant Deed

An investor will generally require the company to grant it a warrant. This is a right for the investor to receive shares in certain circumstances. The warrant deed sets out the terms of the warrant granted by the company.

What Is a Shareholders Agreement?

A shareholders agreement is a contract entered into by the company and all of its shareholders. It governs the relationship between the company and the shareholders. It also sets out the framework for decision making in the company.

Some key items covered in a shareholders agreement include:

  • decisions made by directors against shareholders;
  • who can appoint shareholders;
  • when the company can issue new shares;
  • when shareholders can sell their shares; and
  • what information the company has to provide shareholders.

How Are They Different?

Investors are often interested in what is contained in a company’s shareholders agreement. This is because it affects what rights they will have as a shareholder of the company. If they are not becoming a shareholder immediately as a result of the investment, it indicates what rights they may have in the future when they become a shareholder.

However, investment agreements and shareholders agreements are very different. They cover different subject matter and achieve different purposes.

Key Differences

The table below shows the key differences between investment agreements and shareholders agreements.

Subject Investment Agreement Shareholders Agreement
Purpose The purpose of an investment agreement is to document the terms of the investment transaction. The purpose of the shareholders agreement is to set out the relationship between the company and its shareholders. It also establishes a decision making framework which will be in place until the agreement is terminated.
Subject Matter The terms of an investment agreement are limited to the particular transaction itself. It generally will not have terms which affect the company’s day-to-day operations or general decision making. A shareholders agreement will govern how the company makes decisions on an ongoing basis. It will not contain the terms and conditions of any particular transactions.
Rights of Investors An investment agreement will set out the obligations the company has to the investors in relation to that investment transaction. Generally, it will not require the investor to have any input in company decisions which are unrelated to the particular investment. A shareholders agreement sets out the obligations the company has to its shareholders on an ongoing basis. Certain critical decisions, especially those related to the company’s shares, will likely need some input from shareholders.
Parties An investment agreement is entered into by the company and the investor. A shareholders agreement is entered into by the company and all its shareholders. This may or may not include the investor. It will depend on whether the investor is becoming a shareholder as a result of the investment.

Key Takeaways

Investment agreements and shareholders agreements serve distinct purposes for companies. They are both important, and one cannot take the place of the other. It is important for a company to have a shareholders agreement so it can set out the terms of the relationship between the company and its shareholders. Itis not a transactional document and will not address the terms of any particular transactions. If your company is raising capital, it is important to prepare an appropriate investment agreement to document the terms of the investment. If you require assistance in preparing a shareholders agreement or an investment agreement, contact LegalVision’s business lawyers on 1300 544 755 or by filling in the form on this page.

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