Share Purchase Agreement vs Share Subscription Agreements

By Himanshu Verma

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Introduction

In India, definitive agreements are enforceable contracts that specify the terms and conditions of a merger or acquisition (“M&A”) transaction between the parties. These agreements are usually signed after the due diligence and negotiation process has been accomplished and both parties have agreed and reached an understanding regarding the fundamental terms of the particular transaction. As India’s economy has expanded and attracted more foreign investment in recent years, definitive agreements have been used in the M&A process more frequently. These agreements can contribute to a more seamless and effective deal process by giving both parties clarity and certainty in the transaction.

The Share Purchase Agreement (“SPA”) is a legal document used to sell the shares of a company. This agreement usually happens when an acquirer buys all or a substantial percentage of shares in a target company from an existing shareholder. SPA is always executed after the incorporation of the company and there is a protocol for price valuation because consideration is the key in such an agreement whereas Share Subscription Agreement (“SSA”) is an agreement that is executed between the investors and the company in a share acquisition that involves the issuance of new shares. It is carried out when a company wishes to issue new shares to an investor at a pre-determined price.

Benefits of Share Purchase and Share Subscription Agreements

SPA and SSA offer a plethora of advantages. Here are some examples of how these agreements can benefit parties:

1. Share Purchase Agreement
2. Investment control

SPA provides the purchaser with more investment control than SSA. For example in a SPA, the purchaser may be able to appoint directors or have veto power for particular decisions. This can help to protect the purchaser’s interests and make sure that the investment is according to their goals.

2. Comprehensive due diligence

A significant advantage of a SPA is that it usually involves a more detailed due diligence process. The buyer will have complete access to details about the company’s obligations, risks, and other significant elements that might affect the investment decision. This due diligence procedure aids the buyer in making a better and more proficient investment and may reduce the possibility of misunderstandings.

3. Funding flexibility

When a company sells shares or assets via a SPA, the funds raised can be utilized for any purpose, subject to any regulatory or contractual constraints. This gives the company more leeway in deploying the funds as needed.

4. Investor protections

SPA provides strong investor protections, such as seller’s representations and warranties. Such safeguards may help to lessen the investment’s risks while also giving the buyer access to legal means for redress in the event there is a breach of contract.

B. Share Subscription Agreement 

1. Process control

SSA gives the company more control over the subscription process. The company usually determines the terms of the subscription, including the value and the number of shares to be issued. This enables the company to personalize the subscription to its specific needs while also maximizing the amount of capital.

2. Easy to execute

The additional benefit of an SSA is that it is easy to execute as usually there is no need for extensive due diligence or negotiations, the company and the investor can quickly discuss and come to an understanding on the terms of the subscription. This makes it an excellent choice for businesses seeking to raise capital quickly.

3. Limited risk

Since an SSA involves the subscription of new shares, the buyer has limited risk. The buyer’s liability is restricted to the amount of the subscription, and the investor or buyer is not liable for the company’s past liabilities and obligations.

4. Lower expenses

For businesses, a SSA can be a cost-effective option. As SSA transaction costs are typically lower than those of a SPA. Usually, there are no stamp duties to pay, and the legal fees are lower as there is limited negotiation and due diligence.

5. Ownership dilution

When issuing new shares via a SSA, the company generally does not dilute the ownership of existing shareholders. This can be a significant benefit for businesses looking to raise capital without diluting the ownership of existing shareholders.

Limitations of Share Purchase and Share Subscription Agreements

Some of the potential drawbacks and limitations of SPA and SSA agreements are listed below:

1. Share Purchase Agreement
2. Negotiations

There is an extensive negotiation in SPA and they are generally time-consuming as it frequently involves back-and-forth discussions between the parties. This is because SPA requires more attention to detail and is more complicated and challenging than other types of agreements.

2. Regulatory obstacles

Regulatory obstacles can make it challenging to complete a SPA in some cases. As an example, if a regulatory body needs to authorize the sale of shares then the approval procedure may take a long time and cause delays or other issues.

3. Deal prices

As SPA necessitates more legal and financial expertise, it can be substantially more costly than other types of agreements. The fees for drafting the agreement, conducting due diligence, and obtaining any required regulatory approvals can quickly add up. These expenses may be prohibitively high for smaller businesses or investors in some cases.

2. Share Subscription Agreement
3. Limited due diligence

There is little to no due diligence involved in SSA. The investor may not fully comprehend the company’s financial situation, liabilities, or risks. This can make it challenging for the investor to assess the investment and its potential risks accurately.

2. Investor protection

SSA provides fewer investor protections than SPA. For example, SSA usually not include exhaustive warranties or representations by the company, and the investor generally does not have the same information or control rights as they would have with a SPA. This can expose the investor to potential losses or disagreements with the company.

3. Less flexibility

When a company issues new shares via an SSA, the funds raised must be used for specific purposes, such as capital expenditures or debt reduction. This may limit the company’s ability to use funds as needed.

Essential Provisions and Clauses

The following are some of the key terms and clauses included in SPA and SSA agreements:

1. Share Purchase Agreement
2. Purchase price

This is an essential element in the SPA because it prevents any misunderstandings in the future between the parties as it specifies the details of the shares and shareholding percentage, as well as the purchase price for the shares. The purchase price can be fixed or based on a valuation of the company calculated by an authorized and registered valuer. A primer is also provided by a valuer, which sets out the maximum price that can be charged per share.

2.  Representations and Warranties

This provision outlines the seller’s representations and warranties concerning the financial condition, ownership of shares, and adherence to other legal requirements of the company so that the buyer can feel secure knowing that the business is legitimate and financially stable. It is important to include this clause as a survival clause because, in investment agreements where the investment is substantial and valuable, one must have grounds to recover the money if any party defaults, which is usually discovered at a later date.

3.  Indemnification

If one party’s wrongdoing or any misconduct results in another party suffering a financial loss or a loss to a third party, the responsible party will indemnify. It is an important part of SPA because it adds another level of protection for the parties as the terms of indemnification clauses, especially the lower and upper threshold limits on claims, the subject matter, the time period, and the process to be followed between the parties for handling disputes, are often highly contested.

4. Restriction on announcements and confidentiality

The restriction on announcements is mainly put in place to prevent any negative effects on the transaction or the value of the company’s stock. Confidentiality usually precludes the disclosure of any details related to the ongoing transaction to a third party. This restriction on confidentiality ensures that the confidential information is not misused by the other party and thus, gives a level of comfort to the parties involved in the transaction. The time limitations on confidentiality clauses can stretch from 18 months to two years. This clause mainly states that until and unless the entire agreement is completed and executed, there will be no press release, public announcements, or any other intimation to the public.

5. Conditions precedent

This clause covers representation and warranties because the business does not want any insolvent, criminal, or terrorist shareholders in the company. It also establishes the conditions that must be met before the transaction can be accomplished or finalized. For example, such conditions include obtaining regulatory approvals, concluding due diligence, verifying all share certificates, and signing other legal documents.

6.  Violation of terms

This clause states that if a party violates or breaches any provision of the agreement at any point in time, the other non-breaching party is entitled to claim injunction or compensation, seek specific performance, or can terminate the agreement, etc. The SPA includes terms and conditions that both parties must adhere to during and after the transaction. 

7. Notices

This particular clause provides that any notices, communications, or requests given by one party to another party must be signed by that party or not. It includes the language of the notice and whether the communication will take place via email, fax, or other sources. This clause also describes the repercussions of failing to deliver or reply to a notice on time. This might entail sanctions like fines, damages or in some cases forfeiture of rights, etc.

8.  Completion

This clause specifies the date agreed upon by the parties to finalize and complete the entire transaction. It is the date following the effective date. The activities that must be completed on the completion date are listed in this clause. For example, delivering share certificates and paying the purchase price. To ensure a smooth and efficient transaction, both parties must agree on the closing date and procedures.

2. Share Subscription Agreement 
3. Subscription terms

This provision clarifies the subscription terms, including the method of payment, the number of shares, and the price of the newly issued shares, as it is critical for both the parties i.e. the investor and the company to understand and agree on the subscription terms. It also states that the buyer intends to buy the shares and will deliver the subscription money to the company. Under this clause, the amount of shares or the subscription money should be listed as subscription funds because only after the shares are subscribed and issued, then only they become a part of paid-up share capital. 

2. Representations and warranties

Representations and warranties are significant as they ensure the investor or subscriber that the company has complied with all applicable laws and regulations and possesses all the necessary authorization to enter into and execute an agreement. Similarly, these representations and warranties also reassure the company that the investor will not be entering into an agreement with the information that has not been disclosed publicly and that the investor has been provided with all of the company’s relevant or necessary documents. Under this clause, the company can further ask investors to meet their financial commitments and fulfill the terms and obligations of the agreement. The details of the representations and warranties can be included as an annexure to the agreement. It can cover the buyer’s intention to purchase the shares, the buyer’s acceptance of all the information contained in the offering memorandum, the disclosure by the company of all legally required licenses and approvals, etc.

3. Covenants

This clause specifies the commitments made by the company and the investor regarding future actions. It also specifies the obligations that the parties must follow. For example, the company may undertake to maintain accurate financial records or to obtain any necessary regulatory approvals and also mention the date on which the shares will be issued to the investor as well as the investor may promise not to sell their shares for a set period of time.

4. Transferability of shares

This clause refers to an investor’s ability to transfer shares that he or she has subscribed for to another party. The transferability provisions in the SSA must be carefully considered by both the investor and the company. The transferability of shares clause is essential because investors may want to ensure that they aren’t prohibited from transferring their holdings or shares in certain events, for example in case of mergers or acquisitions. Transfer restrictions and limitations are often required by the company in order to protect the interests of existing shareholders or to prevent inappropriate or unsuitable parties from acquiring substantial ownership in the company.

5. Conditions precedent

Generally, in SSA, the investor is simply purchasing the shares issued by the company, the purchaser will be a shareholder rather than a director or key managerial person in the company, thus, there are generally no conditions precedent or due diligence while executing SSA. In the event, that the investor is taking a huge risk, due diligence will be conducted and conditions precedent will be imposed, this clause will outline the conditions that must be met before the investment can be completed, which may include obtaining regulatory approvals, completing due diligence, signing and executing other legal documents.

6. Closing clause

The closing date of the transaction as well as a provision that specifies the prerequisite conditions and tasks that must be met in order to complete and close the transaction are mentioned under this clause. It also dictates a clear framework for the transaction and ensures that both parties i.e. the company and the subscriber understands their respective responsibilities and obligations. It helps to reduce the possibility of disputes or misunderstandings between the parties and facilitates a hassle-free and effective transaction.

Navigating the Key Differences 

1. Type of transaction

The primary difference between SPA and SSA is the nature of the transaction these agreements cover. A SPA is used when a existing shareholder of a company sells their existing shares to a buyer or investor. This means that the buyer purchasing the existing share and is acquiring ownership of the company from the shareholder. SSA, on the other hand, outlines the terms and conditions of subscribing to new shares issued by the company. Therefore, in SSA the buyer purchases newly issued shares directly from an organization rather than purchasing from an existing shareholder.

2. Parties involved

The seller and buyer are the parties to the agreement in a SPA. The party selling the shares is the existing shareholder who transfers the shares to the buyer, and the buyer is an individual or a company that purchases the shares of an existing shareholder. The parties negotiate the details of the sale, and once agreed upon, the shares are transferred. However, in SSA, the parties to the agreement are typically the company and the subscriber. The company is the one who issues new shares, and the subscriber is the one who buys the newly issued shares of the company. The specifications of the subscription are negotiated by the parties and then the new shares are issued to the subscriber.

3. Disclosure

A SPA requires the seller to provide a comprehensive disclosure, allowing the buyer to make an informed decision. The seller discloses all significant details about the company, including its books of accounts, legal history, currently pending lawsuits, and conceivable liabilities. These disclosures ensure that before buying the shares, the buyer is aware and has knowledge of the company’s financial situation and potential risks. On the contrary, the SSA usually does not require full disclosure. The company may give the subscriber some information, but the amount of disclosure is typically less than what is required by SPA. However, a SSA will still include certain representations and warranties made by the company to the subscriber regarding the veracity of the information provided by the company as these representations and warranties are generally relied on by the subscriber while investing.

4. Negotiable price

The terms of a SPA must be negotiated, including the purchase price of the existing shares, representations and warranties, closing prerequisites, and other specifications. A SPA, therefore, gives the buyer more opportunities to haggle over a fair price. On the other hand, SSA gives the company less leeway to negotiate because it sets the terms of the subscription and has greater control over the price of the new shares.

5. Representations and warranties

Although both agreements include representations and warranties, the scope and nature of these representations and warranties differ considerably. In a SPA, the seller makes numerous representations and warranties to the buyer about the company being sold, including its financial condition, liabilities, assets, contracts, and other concerns. Indemnification clauses tend to come with these representations and warranties, requiring the parties to reimburse for any losses sustained as a result of a breach of this clause. SSA, on the other hand, typically has fewer representations and warranties than SPA, and only the existence of the company, its right to issue shares, and a few other particulars are subject to representations and warranties from the seller or the company as there is a less chance of any pre-existing issues because the subscriber is subscribing to new shares rather than purchasing existing shares.

6. Conditions precedent 

SPA contains more conditions precedent than SSA. This is because a SPA involves the transfer of existing shares, and the buyer must make sure that all prerequisites are satisfied before purchasing the shares. Condition precedents may include obtaining approval from regulators, consent from other shareholders, ensuring that the company has fulfilled all of its obligations, etc. In contrast, SSA contains no or few conditions precedent. The primary condition is usually that the company is authorized to sell the shares and that the subscriber pays the subscription price, the company might not need additional requirements to be met before issuing the shares. This makes the SSA process quicker as well as easier than a SPA.

7. Change in share capital

In a SPA, the buyer purchases existing shareholder’s shares, but the company’s share capital remains unchanged because the buyer merely takes the previous shareholder’s place, and the company’s actual share capital is unaffected by this transaction. In contrast, in SSA, the subscriber becomes a new shareholder and owns a specific proportion of all the company’s shares because new shares are issued to the subscriber, and due to this, there is a change in the share capital of the company.

8. Right to vote

SPA is a sale of existing shares that gives the purchaser both ownership and the right to vote at business meetings. The purchaser becomes a shareholder in the business and can influence the company’s decisions. Contrarily, SSA doesn’t involve the transfer of existing share ownership, as a result, the investor generally has no ownership or voting rights.

Choosing Between Share Purchase and Share Subscription Agreements

SPA and SSA are the two commonly used agreements in India for the transfer of shares. Although these agreements appear to be identical, there are a few key distinctions that should be consider while deciding which one to use in a specific transaction.

Share Purchase Agreement

An SPA is preferred over other types of agreements such as stock purchase agreement or asset purchase agreement in the case when the buyer intends to acquire an ownership position in the company, including its operations and management because SPA provides them more control over the business. It is also employed when a business is merging or being acquired and the buyer want to buy the stocks held by the existing shareholders. A SPA additionally offers protection for the buyer and seller, guaranteeing that each party’s interests are protected.

Share Subscription Agreement

When a business in India wants to raise money by issuing new shares, they use SSA. This agreement can be executed when the business is growing, making new investments, or needs money for other business requirements. In such circumstances, the business may decide to grant investors new shares. It is a helpful tool for businesses looking to raise money by issuing new shares. It can be opted in cases where companies don’t want to take loans and issue debentures as well as when shareholders don’t want to lose their existing stake in the company by selling their holdings to a third party but need more funding. SSA can aid in the process of raising money and make sure that the company and the investors are on the same wavelength by outlining every aspect of the investment in an unambiguous and concise manner.

Conclusion

The SPA and SSA are important investment agreements that assist parties while transferring shares. Both agreements are entered into to protect the party’s interests, but since each agreement has its own set of benefits and limitations, understanding the nuances and legal obligations of SPA and SSA is essential for ensuring a successful and legally sound transaction.