Share Purchase Agreement vs Share Subscription Agreement
Agreement

Difference Between Share Purchase Agreement and Share Subscription Agreement

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When it comes to corporate finance, investors and companies must take into account many intricacies of certain types of agreements. These are two essential documents that underlie equity transference and include the Share Purchase Agreement and the Share Subscription Agreement. Both of them play similar functions in enabling the share transfer but are different in terms of purpose, function, and consequence. This blog will focus on comparing and contrasting PPAs and their legalities and suitability in different situations.

What does SPA stand for in business?

A Share Purchase Agreement is a legal instrument which define the manner, terms and conditions under which the investor buys the shares from a seller for instance, existing shareholders or the company. Public and Private Transactions involve Share Purchase Agreements and most of them are used frequently in mergers and acquisitions.

Main provisions of a Share Purchase Agreement

  1. Transfer of Existing Shares: Selling Share Purchase is usually used in the trading of already issued shares instead of new ones to be issued in the market. This means that the seller is conveying title to shares which are already in the market place.
  2. Negotiation of Terms: In the SPA, the following key details of the sale of ordinary shares are highlighted; number of shares to be sold, the consideration to be paid for the shares as well as the mode of payment. It again can include representations and warranties by each of the parties.
  3. Conditions Precedent: Offer and/or share purchase agreements state certain conditions precedent which are conditions that must be fulfilled before the transaction can go through.
  4. Post-Completion Obligations: The transfer arrangement also provides for undertakings for the buyer and seller upon the closing of the transaction, as well as restrictive and indemnifying covenants.

Importance Share Purchase Agreements Matter

SPA are useful when it comes to protecting the rights of the buyer and the seller in the business transaction. They are particularly helpful because they avoid the disputes and misunderstandings which are likely to occur in the absence of agreement. Through describing the details of the transaction, Share Purchase Agreements serve to describe the exact details of what has been agreed between the buyer and the target firm.

What is a Share Subscription Agreement or SSA?

A share subscription agreement is quite different and refers to an agreement where the investor is going to acquire new shares directly from the organization in exchange for an agreed price. Share Subscription Agreement are normally used in private placing, venture capital and start up funding.

Major Components of Share Subscription Agreement

  1. Issuance of New Shares: While SPA is concerned with debenture subscriptions, SSA is concerned with the issuance of shares for the first time, implying that the company is issuing new equity to the subscribers.
  2. Subscription Price: Under the Share Subscription Agreement, the share subscription is done at a certain price per every share and the number of shares to be issued. This may be pegged on any means, be it valuation or other set measures and or formula.
  3. Conditions and Rights: Essentials sometimes noted within the Share Subscription Agreements may include voting rights, dividend and liquidation terms. These are features that investors may negotiate to favor their side in a particular business venture.
  4. Regulatory Compliance: Subscriptions must also note that the issue of Share Subscription Agreements must be in accordance with the established securities laws especially in private placements. This section comprises ‘’disclosure and reconciliation’’, which are the information statements that the company is required to make to the investor.

Importance of Share Subscription Agreements

Share Subscription Agreements are important in the development of Equity financing especially for firms that wish to raise capital. They not only assist in the flotation of new shares but also assist in the creation of a raw form of a relationship between the firm and the investors. Thus, Share Subscription Agreements help in establishing understanding of the financial relation, as they define certain terms of the investment.

 Main Distinctions Between Share Purchase and Share Subscription Contracts

  1. Nature of Transaction

  • Share Purchase Agreement: This is the process through which a buyer acquires securities from a holder without forming a new company. The shares are already in existence; the seller simply passes the title to the buyer.
  • Share Subscription Agreement: Refers to the situation where the company floats new stocks within the market to the investor. This is because the company develops new equity to issue funds.
  1. Parties Involved

  • Share Purchase Agreement: The main players include the buyer that is the investor and selling party which may be the existing shareholder or the company.
  • Share Subscription Agreement: The major stakeholders are the investor (the subscriber) and the company that offers the share(s).
  1. Purpose

  • Share Purchase Agreement: Common in mergers and acquisitions and in transactions involving the secondary market where control of existing shares transfers.
  • Share Subscription Agreement: Employed mainly for the purpose of sourcing funds through the offering of more shares to the public, usually in venture capital or other start-up organizations’ financing.
  1. Pricing Mechanism

  • Share Purchase Agreement: The price for such a deal can be fixed depending on the current offering price of the existing shares or the tandem price elements agreed by both of the parties.
  • Share Subscription Agreement: Subscription price is arrived from the value placed on the company and the proposed subscription terms and conditions which include early bird discount, or cooperation discount among others.
  1. Regulatory Considerations

  • Share Purchase Agreement: Although SPA is subject to legal and regulatory provisions, the most important element of SPA is concerned with ownership of the shares.
  • Share Subscription Agreement: Share Subscription Agreements customarily contain more extensive disclosure to comply with the law, especially when preparing for a private placement. They may also lead to filing with regulatory agencies.

Legal Consequences of Share Purchase and Share Subscription

Due Diligence

While due diligence applies to both Share Purchase Agreements and Share Subscription Agreements, they both are characterized by different emphases. Note that in a Share Purchase Agreement, there is an evaluation of the existing shares based on the company’s financial statements, legal documents and other operational issues with the aim of determining risks and values. On the other hand, the investor in a Share Subscription Agreement mainly concentrates on the prospects of the company, its business plan and conditions of the market since he is subscribing to the shares of the company by which existing shareholders may be diluted.

This is perhaps due to the fact that representations and warranties have been the subject of increased legal attention of late.

Representation and warranties

Every single agreement has representation and warranties that are also tied directly to the agreements’ context. Also in a Share Purchase Agreement, the seller gives undertaking to the buyer of title and availability free from encumbrances and conformity to law. On the other hand, in Share Subscription Agreement the company warrants the business condition and the new shares, thus, the investor has no risks of being given wrong information.

Indemnification

Arising from the nature of the transactions in both documents, the parties agree to limit the extent of compensation for losses resulting from a breach of the agreements through indemnification Clauses.

Dispute Resolution

Each agreement includes ways on how to address and solve conflicts such as negotiation, mediation or arbitration along with jurisdiction and governing law, which makes it even more challenging.

Conclusion

It is therefore important for investors, companies and legal experts especially when one has to decide between either investing through Share Purchase or Share Subscription Agreements. In as much as both agreements provide for transfer of equity, they have different uses, different parties to the agreement and are legally handled differently.

In so doing, different stakeholders becomes in a position to make some of the right decisions subject to their financial strategies as well as objectives. In every tendering situation whether entering into M&As or in equity financing, the option between these agreements may determine the flow of the transaction.

Potential employees should always consult with their attorneys and carefully review agreements before signing them because they would be tied to something they do not comprehend completely. However, when organisations are selecting between a Share Purchase Agreement and a Share Subscription Agreement, they have to think keenly about their capital requirements, their relation with shareholders, and future development policies. Thus, substantive knowledge of these instruments can lead to successful transactions and beneficial cooperation.

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