How to generate an Ordinary Shares Investment Agreement
What is an Ordinary Shares Investment Agreement?
With an Ordinary Shares Investment Agreement, an investor will gain the right to vote in the company’s meeting and also eligible for the dividend generated from the company’s profit.
An Ordinary Shares Investment Agreement is a method to raise funding for a company instead of opting for traditional methods like bank loans.
An Ordinary Shares Investment Agreement is a contract for an investor to invest in a company and get ordinary shares in return.
It is crucial that, at an early stage of the discussion, the parties have a good idea of the nature of the investment, as well as the different rights and restrictions that attach and apply to different investment instruments. Always bear in mind that there is not a single universal set of rights or restrictions for investment, and that each provision is a matter of negotiation between the parties. Therefore, it is important for you to understand the differences between various investment instruments, and to choose the method most suited to both your company and the investor’s interests.
In this Ordinary Shares Investment Agreement, we have simplified the language as far as possible to make it user friendly for non-legally trained businesses. We have structured the agreement as follows:
- single investor;
- single completion;
- company being the holding company of a group of companies (if there are multiple companies involved in the business); and
- simple standard warranties.
If you need the following customisation to the document, you may need help from lawyers:
- multiple investors;
- multiple tranches of completion;
- tailor-made warranties to be given to the investor; or
- tailor-made rights and restrictions for ordinary shares.
What are the differences between an Ordinary Share and a Preference Share?
An Ordinary Share gives shareholders the right to vote on important matters such as appointing directors and can participate in internal corporate governance through attending annual meetings and voting. Shareholders can receive dividends if the company has made profits and is also protected against the financial obligations of the company.
A Preference Share doesn’t give voting rights to its shareholders but they will be given preferred treatment over the ordinary shareholders and a fixed amount of dividend payment is paid to its shareholders. They also enjoy a priority right to be repaid if the company becomes insolvent or entering liquidation in the future.
An Ordinary Share Agreement may include:
- Details of the subscription, including the price and number of shares to be subscribed for;
- Conditions to be fulfilled before subscription is completed;
- Undertakings of what to do/not to do by the company before completion;
- Things to do at completion;
- Board composition after completion;
- Warranties in respect of various aspects of the business;
- Limitation on warranty claims;
- Basic information of the company; and
- Details of the issued share capital of the company, including any convertible securities or employee share options in place.
What are the advantages of the Ordinary Shares Investment Agreement?
Voting Rights: Common shareholders can participate in internal corporate governance through voting. Ordinary shares provide a small degree of ownership in the issuing company. Stockholders have a certain amount of say in how the company is run and are allowed to vote on important decisions, such as the appointment of a board of directors. For each share of common stock owned, the stockholder gets one vote, so the stockholder’s opinion becomes weightier when they own more shares.
Capital Gains and Dividends: An investment in ordinary shares has the potential for unlimited gains, while the potential loss is limited to the original amount invested. Selling shares at a higher price than the original purchase price results in the investor realizing a capital gain.
Limited Liability: Common shareholders are protected against the financial obligations of the corporation and are only liable for the value of their shares. They also gain preemptive rights. Shareholders with preemptive rights gain access to new share issues before the rest of the investing public, often at a discount.
Benefits for Issuing Companies: Issuing common shares is an important way to raise capital to fund expansion without incurring too much debt. While this dilutes the ownership of the company, unlike debt funding, shareholder investment need not be repaid at a later date.
Ordinary shares: Ordinary shares are the main type of share(s) among private limited Companies. In such companies, all shareholders will have the same rights. The holder(s) of ordinary share(s) are generally entitled to:
- Attend General Meetings and vote: Ordinary shareholders can participate in internal corporate governance through attending annual meetings and voting. They are allowed to vote on important matters such as appointing directors. They can have one vote per share subject to the Company’s Constitution;
- Share in Company’s profits: Shareholders can receive dividends if the Company has made profits and decided to distribute them.
- Have a distribution on winding up: If the Company is wound up, shareholders entitled to any remaining assets of the Company after all its debts are cleared;
- Limited liability: Shareholders are protected against the financial obligations of the Company and are only liable for the value of their shares.
Preference shares: Preference shares commonly give some sort of benefit or preferential rights to the holder(s) over and above the rights of Ordinary shareholders. Those rights and benefits to the Preference share(s) will vary from Company to Company and should be set out in the Company’s Constitution in accordance with the Singapore Companies Act. Most Preference shares provide their holders with:
- fixed or preferential rights to a dividend;
- priority claims on the assets upon liquidation of the Company;
- redeemable shares: the Company may “buy back” the Preference shares from the holder at a fixed price; or
- convertible shares: the holder can exchange Preference shares for other capital instruments (such as convertible notes) issued by the Company.
Reserved matters: Such decisions include changing rights attached to shares, amending the articles of association, changing share capital structure, or changing name or registered office address.
Why do companies issue ordinary shares?
Ordinary shares are also called common shares. They are equity stocks that provide voting rights to the stockholders. Companies issue ordinary shares to raise capital for business. Ordinary shares represent ownership of stockholders in a company in proportion to their shareholding.
These shares are a great source of finance with no debt element in them.
Conclusion
All kinds of businesses require some amount of funds for their growth and expansion. Although there are different methods to raise funding, an Ordinary Shares Investment Agreement provides an investor with the benefits of voting rights and limited liability.
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