I have previously written several articles on commercial agreements or contracts. For example, on January 11, 2022, I wrote an article titled “Agreements for buying and selling existing shares”.
With greatest respect, agreements for the exchange of existing shares and those for the issue or subscription for new shares are often confused by many people.
To me, it’s understandable. In this article, I look at a share subscription agreement.
Difference between acquiring existing shares and subscribing for new shares
The acquisition of existing shares involves existing or current shareholders transferring, usually through sale, the shares they currently hold, which are already issued by the company, to a new shareholder. In other words, an existing shareholder reduces his / her current shareholding in favour of another shareholder, current or new.
In the case of new shares, a company issues new shares from its authorised shares, usually for monetary consideration in the form of payment by the shareholders.
It is common for shareholders and the company that will issue the shares to agree on share subscription by the shareholders.
This may happen in the case of the initial issue of shares on company formation of the company or subsequent issues, such as rights issues of shares.
Key clauses/components of a share subscription agreement
These include the following:
Parties to the agreement
Preamble
Interpretation and definitions
Any conditions precedent
Subscription of shares and price
Payment for the subscription price
Breach
Dispute resolution
Governing laws
Addresses for service
Parties
The parties are usually the shareholders who wish to subscribe for the new shares in the company (“subscribers”) and the company which will issue the shares (“the company”).
Preamble
Like in most agreements, the preamble gives context or background to the agreement. This may include provisions/statements such as the following:
The company wishes to issue new shares to raise capital.
The subscribers wish to subscribe for shares in the company for consideration/price.
Stating the company’s authorised share capital and that out of that the company wishes to issue/allot so many shares or the contemplated shares to each of the shareholders in the agreed proportion.
Interpretation and definition
As usual, this is meant to bring clarity, for example defining the terms. Some of the terms used in share transactions are technical or not common.
Conditions precedent
The subscription for shares may be subject to / depend on certain conditions precedent, for example:
Certain approvals, for example, regulatory approvals such as exchange control.
For an existing company, resolutions are passed by the existing shareholders and directors for the issue of shares.
If shareholders are juristic persons, then resolutions are passed by those juristic persons.
Subscription for shares
This is the main part of the agreement. This part clearly sets out the number of shares to be issued or allotted to each of the shareholders and the share price or monetary consideration to be paid for the shares.
Payment of the subscription price
This part clearly spells out how much each shareholder is to pay for the shares he/she is subscribing for and by when. The company’s bank accounts are usually included.
Closing
This term is usually defined and states what happens to give effect to or to finalise the subscription. This may include the following:
The shareholders will be allotted the shares they are subscribing for.
Names of shareholders will be entered in the register of shareholders.
Share certificates to be issued and delivered to the shareholders.
Breach
This covers what a breach is and the consequences of the breach.
Dispute resolution
This is common in most contracts and may include dispute resolution through mediation, arbitration, or litigation.
Governing laws usually stated in the laws of Zimbabwe
Addresses for services
This is standard in contracts for the purposes of serving documents, including legal documents.
Conclusion
A share subscription agreement is one that shareholders and a company enter into for the subscription of new shares by the shareholders in the company. It is an important agreement and it is advisable to always sign one.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations), MBA(EBS, Heriot-Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, a chartered accountant, insolvency practitioner, and commercial arbitrator, registered tax accountant and advises on deals and transactions. /He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He sits on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or gohofisi@ gmail.com. Visit www//:hofisilaw.com for more articles.-herald
