A Guide To Share Subscription Agreements

As a small business owner or entrepreneur in New Zealand, pitching to potential investors to raise capital can be nerve-wracking. But when a potential investor has agreed to buy shares, ensuring that they will actually follow through with the purchase is crucial!

This is where a Share Subscription Agreement comes into play. It serves as a commitment from potential investors who have agreed to buy shares to honour their promise.

Understanding the details of Share Subscription Agreements is vital for small business owners and entrepreneurs in New Zealand, as it provides an added layer of security when you’re looking to expand and grow your business.

But, don’t worry, it’s not as complex as it may sound!

What Is A Share Subscription Agreement?

A Share Subscription Agreement is a formal contract that ensures your potential investors will purchase the shares, and that your business will issue those shares accordingly.

The agreement delves into more detail about the commitments made by potential shareholders to invest in your business.

Along with the Share Subscription Agreement, a term sheet will outline the terms of the deal between the investor and the founder. You can learn more about term sheets here.

What Do You Need To Include In A Share Subscription Agreement?

Key Terms

There are several terms within the agreement that specify the investment and the process of buying and selling the shares.

Examples of terms a Share Subscription Agreement will include are:

• The number of shares to be issued
• The price per share
• Any conditions to which the shares are subject
• When the shares will be issued

Prices

Securing a price for the shares is one of the main advantages of a Share Subscription Agreement.

This arrangement makes it easier to ensure that investors provide the funds needed for the growth of your business!

As you attract more investors to buy shares, consulting with a commercial lawyer is essential to navigate your business’ expansion in New Zealand.

Representations And Warranties

A Share Subscription Agreement will also include representations and warranties. These are statements that clarify for the investors, the company, and sometimes the founder, exactly what they are committing to.

These statements typically confirm the assets owned by the company, the accuracy and completeness of the information within the agreement, and that the business is not involved in any legal disputes.

It is crucial that a lawyer ensures that the representations within the agreement are not misleading or deceptive and do not lead to any unintended, unlawful costs. Neither you nor your investor would want that!

Termination Clause

Sometimes, after the documents have been signed, one party may decide not to proceed with the deal.

While it can be disappointing, a lawyer can help draft terms into the agreement that allow investors and businesses to withdraw from the deal under certain conditions.

Be sure to read through the agreement carefully to understand these conditions!

When Is A Share Subscription Agreement Needed? Are There Alternatives?

A Share Subscription Agreement may be necessary if a potential investor has requested one. As a small business owner or entrepreneur in New Zealand, be aware that venture capital investors are particularly likely to ask for such an agreement.

If your investor prefers not to use a Share Subscription Agreement, a Share Subscription Letter might be a more suitable option, as it is generally more favourable for the company.

A Share Subscription Letter outlines the company’s commitments, with the main difference being the absence of company or founder warranties. This means that the potential investor would need to conduct their own due diligence.

While it can be an excellent alternative to a Share Subscription Agreement, a Share Subscription Letter is more commonly used in the early stages of funding, especially when raising capital from friends and family.

What Happens After Signing A Share Subscription Agreement?

Once all parties have signed the agreement, the procedures outlined in the document must be followed.

This typically involves steps such as:

• the company or board passing a resolution to issue the shares
• the investors paying the agreed sum
• issuing share certificates to the investors
• the company updating its member register and notifying the New Zealand Companies Office of the new shareholder and the number of shares they hold

What To Take Away

In summary, Share Subscription Agreements are crucial in ensuring that both potential investors and the business are committed to the transaction of buying and selling shares at an agreed price.

If the agreement does not serve the best interests of the potential investors or the business, the warranties and termination clauses will allow either party to withdraw from the deal.

If you’re considering raising capital for your business in New Zealand, give us a call on 0800 002 184 or email us at [email protected] and we’ll be happy to assist you!

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