There is confusion between the terms share purchase agreement, share subscription agreement, and shareholders agreement. Parties entering into such agreements often misunderstand these agreements as the same and serve the same purpose. In this blog, an attempt has been made to clarify the differences between these three agreements.
Difference Between Share Purchase Agreement, Share Subscription Agreement & Shareholders Agreement
Share Purchase Agreement:
A Lawful agreement in which the shares are transferred from one party to another. It is drafted when one of the shareholders of the company wants to sell his equity to another shareholder and wants to exit the company. The buyer can be an individual or even a company. It is required when existing promoters will sell the shares or new investors will purchase shares from existing shareholders to give them an exit. It also does not lead to the dilution of the stake of the existing shareholders of the company. In this agreement, the consideration is credited into the account of the seller of the share i.e. an investor or promoter of the startup or company who wants to sell his stake in the company. It is a faster method to acquire a stake in the company as compared to the share subscription agreement.
Share Subscription Agreement:
It is an agreement that is entered into between the company and the subscriber of the new shares issued by the company. When a company wants to issue new shares of the company (not founder or existing shareholders selling their shares), they go for a shares subscription agreement. It is done when a company wants to diversify its business or wants to enhance the scale of its business. Such a new issue of shares can lead to the dilution of a stake of the shares already held by the existing shareholders. In this agreement, the consideration paid by the buyer of the shares is credited to the account of the Company as the company issues additional shares at a predetermined price. It is a slower method to acquire a stake in the company as compared to the share subscription agreement.
Shareholders Agreement:
It is an agreement entered into to describe the rights and obligations of the company and the shareholders. It defines the actual relationship of the parties in terms of rights generated by purchasing shares of the company. It is entered into between all the shareholders and the company or between a class of shareholders and the startup or company. It protects the investment of the investors by defining the rules and regulations of a shareholder. Its scope is wider as compared to the share purchase agreement and shareholders agreement as it clearly defines what roles, responsibilities, and powers a shareholder will get in the company.
Conclusion:
So by going through this blog, the readers will be able to understand the basic differences between these three agreements. It will also help entrepreneurs, angel investors, and funding investors who frequently deal with such documents to know exactly what roles these three documents play individually. They will know the exact agreement which is to be drafted under varying situations and circumstances. In the next blog will see about the clauses that form part of a shareholder’s agreement.
