An investment agreement is an agreement between an investor, a company, and the shareholders of that company. This agreement allows an Investor to invest in a company where the shareholders sell off some or all of their shares in lieu of the sale consideration. The sale consideration is thereafter put into the capital of the company itself. An investment agreement has specific details as to the value of each share, number of shares being sold, along with rights and dividends associated with those shares.
Who is the company?
The company is the legal entity in whose capital the investor wishes to make an investment in, under the terms and conditions of the investment agreement. Since it is in the capital of the company where the investment is being made, the company is included as a party to the investment agreement, duly represented through an authorized person of the company to execute the investment agreement.
Who are the Shareholders?
A shareholder is a party who sells their shares under the terms and conditions of the investment agreement. The shareholders enter into this agreement with the intention to sell a specific portion of shares at a fixed price, which is calculated in terms of price of a single share. This fixed price is then paid by the investor to purchase those shares. Once the transaction is complete, the shareholder transfers all the rights and liabilities associated with the shares to the investor.
Who is the Investor?
An investor is the party who is desirous of investing in the company under the terms and conditions of the investment agreement. The investor is able to do so by purchasing the shares from the shareholders on such terms and conditions as may be mutually agreed to between the parties. The investor agrees to a specific price per share that he is willing to pay to buy any number of shares, subject to the shareholders accepting it. Once the transfer of shares has been completed, the investor is legally known as a shareholder of such company.
What are the reasons for having an investment agreement?
In the corporate world, it is common practice to invest one’s capital in different entities, which includes companies. This type of investment is practised in order to increase an investor’s chances of good returns and open a different stream of passive income.
Investment in a company is usually done by purchasing shares from a person or an entity who is already a shareholder of that company. It is easier said than done as there are a variety of complex factors that an investor needs to mind in order to facilitate a smooth and seamless transaction of purchasing shares in a company. Therefore, it is important to have a written agreement which specifies these complex factors in detail.
An investment agreement is the best option to choose when it comes to investments in a company as it contains provisions as to what shares are to be purchased, the value per share, the details of the rights and dividends associated with the shares, and the amendment of the article and memorandum of association of a company.
Thus, an investment agreement is an important instrument to define all the rights and obligations so that the entire transaction of investment can be completed thoroughly by all the parties involved. Furthermore, an investment agreement allows the investor to invest in the company and take over the defined number of shares in the company, all the while retaining the company’s staff and employees. Thus, an investment agreement ensures that the entire transaction is navigated without any consequences for a third party or their involvement.
What does an investment agreement cover?
An investment agreement outlines the investment by an investor into a company by purchasing shares of that company. This agreement can have any terms that the parties may mutually agree upon. However, the following are some of the most important terms that any investment agreement must have:
1. Personal information of the parties
It is important to describe all the parties involved in the investment agreement. This would generally include the names, addresses, passport numbers and email IDs of the parties who are natural persons. If any of the parties to the investment agreement is a corporate entity, their trade/commercial license should also be included to properly describe that party.
2. Commencement and Completion Date
An agreement should always have a specific starting date, or the Commencement Date. This is the date on which the legal relationship between the parties mentioned in the agreement commences. A closing date or a completion date is equally important as it specifies the time period by which the transaction of investment should stand completed.
3. Purchase Price or Sale Consideration
The purchase price or sale consideration is the total amount to be paid in lieu of acquiring the shares in order to secure the investment in the company under the terms and conditions of the investment agreement. The agreement should also contain the value per share that the party intends to purchase.
4. Types of shares that are being purchased:
As the rights associated with different types of shares differ vastly, it is of paramount importance to describe the type of shares that the investor is intending to acquire from the shareholder under terms and conditions of the investment agreement.
5. Respective rights and liabilities of the parties
An investment agreement should specify the respective rights and liabilities of each party under the agreement. It is important to outline their respective positions accurately in the agreement to ensure that all the parties are properly equipped to handle any obstacles in the future.
6. Dividends and rights associated with the shares
As mentioned above, there are different types of shares, and each type may grant certain associated rights as well as dividends that accrue on the same. Thus, an investment agreement should specify when these rights will transfer to the investor and the extent of their claim over the dividends of the company.
7. Indemnification and limitation of liabilities
An investment agreement should also typically outline if the parties are liable to be indemnified and if at all, to what extent would the liability of either party be.
8. Governing law
This is one of the most important clauses in an investment agreement as it outlines the law which will govern the agreement as well the jurisdiction of any cases to be filed, if any, assuming that any dispute arises in the future. When the agreement involves parties from different jurisdictions, the clause which specifies the governing law attains even more importance.
9. Additional terms
An investment agreement could incorporate such other additional terms as may be mutually agreed between the parties such as confidentiality, termination, non-disclosure, etc.
These additional terms define the relationship of the parties in a much more detailed manner, in order to reduce the chances of any disputes in future.
The objective of having different clauses apart from the usual ones is to mitigate the risk associated with any agreement. More streamlined clauses and specifically defined terms in an agreement allows the parties to have con fidence that theirs rights are duly protected.
Our online form provides for a range of customisations that cater to all clients on a case-by-case basis. We provide our clients with more freedom and control in terms of what their investment agreement should cover. Please see our different packages to see various options available to the clients in terms of personal customisation of their investment agreement.