Difference Between Share Subscription Agreement (SSA) & Shareholder Agreement (SHA)

 When founding a company, it's common to encounter both the Shareholders Agreement and the Share Subscription Agreement. While these are distinct documents, they are sometimes merged into a single investment agreement. However, for clarity's sake, it is generally advised to keep them separate. In this blog post, we will delve into the key differences between these two agreements.


Share Subscription Agreement (SSA)

A Share Subscription Agreement is essentially a contract between the company and an investor, outlining the purchase of ownership in the company through the issuance of additional shares. This acquisition can involve either buying existing securities or issuing new shares. The primary purpose of a Share Subscription Agreement is to provide a clear and unambiguous framework for the investor's investment(s) in the company, ensuring that all aspects of the subscription are well-defined. This agreement's main objective is to compel both parties to complete the investment process without any ambiguity at a later stage.

When Is a Share Subscription Agreement (SSA) Required?

While it's not mandatory to execute a Share Subscription Agreement, it is highly recommended due to its value. This document explicitly states the conditions under which a person (the subscriber) agrees to purchase shares from the company, signaling an investor's intention to become part of a limited partnership within the company. Under the subscription agreement, the terms for the company to sell a specific number of shares in exchange for a predetermined amount from the private investor are specified. The liability of potential investors under the subscription agreement is limited to the invested capital amount.

Advantages of Share Subscription Agreement (SSA)

  1. Ideal for Start-ups: SSAs are particularly advantageous for start-ups seeking early-stage capital.
  2. Ownership Preservation: It's the preferred choice for ventures in their early stages, allowing founders to avoid diluting their ownership stake.
  3. Limited Liability: Investors' liability is limited to their capital investment, offering protection in case of company bankruptcy.
  4. Lump Sum Investment: SSAs enable investors to make a one-time, pre-specified investment, simplifying the process.

Contents of Share Subscription Agreement (SSA)

  1. Parties to the Agreement
  2. Definitions & interpretation
  3. Term of the agreement
  4. Shareholding pattern
  5. Subscription to the investor subscription securities
  6. Conditions precedent
  7. Closing
  8. Representations & warranties
  9. Covenants
  10. Indemnification
  11. Termination and default
  12. Specific performance
  13. Notices
  14. Governing law
  15. Dispute resolution

Shareholders Agreement (SHA)

A Shareholders Agreement is a formal contract between the company and its shareholders, establishing rules for the operation of the business. This agreement governs the relationship between shareholders, company management, share ownership, rights, obligations, and shareholder protection. It may also dictate the company's operational procedures. When launching a business with multiple investors, a comprehensive Shareholders Agreement is essential.

When Is a Shareholders Agreement (SHA) Required?

A Shareholders Agreement is required when a company is formed, and multiple individuals are contributing capital to the business. Creating and signing this agreement at the company's inception helps avoid complications or misunderstandings during its formation. Even if a company already has articles of association defining its rules, a Shareholders Agreement adds further clarity and security.

Advantages of a Shareholders Agreement (SHA)

  • Rights Protection: SHA safeguards shareholders' rights.
  • Roles and Responsibilities: It defines shareholders' roles and responsibilities.
  • Dispute Resolution: It provides predetermined dispute resolution procedures, saving time and resources.
  • Management-Shareholder Relationship: It regulates the relationship between company management and shareholders.
  • Share Transfer Control: It restricts minority shareholders from transferring shares to competitors or other parties.

Contents of a Shareholders Agreement

Details of the Parties entering into this Agreement

Total authorized capital of the Company

  1. Shares held by each Shareholder and their percentage of Company ownership
  2. First refusal right by other Shareholders before transferring any Shares
  3. "Drag-along rights" and "tag-along rights"
  4. Provisions related to the rights and obligations of the Directors/Board
  5. Details related to the management of the Company
  6. Non-compete clause
  7. Non-solicit clause
  8. Board of Directors
  9. Reserved Matters
  10. Termination
  11. Dispute Resolution

Conclusion

In summary, the major difference between a Share Subscription Agreement (SSA) and a Shareholders Agreement (SHA) lies in the nature of acquisitions—SSAs pertain to the purchase of securities, while SHA covers the issuance of new shares. An SHA is crucial when a company is formed with multiple contributors to ensure smooth operation, while an SSA primarily serves as the initial document when securing investments, providing clarity about control, positions, and investment returns. Both agreements play vital roles in structuring and safeguarding the interests of a company and its stakeholders.

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