{"id":29762,"date":"2023-09-22T22:24:03","date_gmt":"2023-09-22T14:24:03","guid":{"rendered":"https:\/\/zegal.com\/?p=29762"},"modified":"2023-09-22T22:25:45","modified_gmt":"2023-09-22T14:25:45","slug":"investment-agreement-vs-shareholders-agreement-whats-the-difference","status":"publish","type":"post","link":"https:\/\/zegal.com\/en-au\/blog\/post\/investment-agreement-vs-shareholders-agreement-whats-the-difference\/","title":{"rendered":"Investment Agreement Vs. Shareholders Agreement: What\u2019s the Difference?"},"content":{"rendered":"\n
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An investment agreement and a shareholders agreement are two commonly confused legal documents frequently used by corporations, big and small.<\/p>\n\n\n\n

Distinguishing between the two will enable you to seamlessly integrate new shareholders\u2019 fundraising investment efforts and consolidate ownership rights over your company.<\/p>\n\n\n\n

Among the plethora of contracts and agreements available for companies of all sizes and stages of development, Investment Agreements<\/a> and Shareholders Agreements<\/a> remain two of the most valuable contracts as they expedite the process of outlining the proper exercise or refrain of power by shareholders and, more importantly, define the terms of investment to new partners.<\/p>\n\n\n\n

While an investment agreement sets forth a contract for individuals wanting to purchase ownership in a company<\/strong>, a shareholders agreement outlines a new shareholder\u2019s rights over the company<\/strong>.<\/p>\n\n\n\n

<\/span>Investment and shareholders agreement<\/span><\/h2>\n\n\n\n

In the case of investment agreements, the individual need not be a new shareholder but can be an existing shareholder or outside investor.<\/p>\n\n\n\n

<\/span>Adherence<\/strong><\/span><\/h3>\n\n\n\n

An Adherence Clause <\/strong>is one of the most commonly found provisions within investment agreements, which obligates any later transferees of the stock to be subject to the terms of the contract.<\/p>\n\n\n\n

It is usual to have a provision requiring any transferee to enter into a deed of adherence<\/a>, which treats the new shareholder as if they were an original party to the investment agreement and, therefore, bound by the agreement\u2019s provisions.<\/p>\n\n\n\n

There is often a discretion for the board to waive this requirement and an exclusion for those exercising options. By signing a deed of adherence, the new shareholder is bound by the same rules as the existing ones.<\/p>\n\n\n\n

It also ensures that the new shareholder receives the benefit of the rights given to the other shareholders under the shareholders\u2019 agreement.<\/p>\n\n\n\n

This necessary provision is only binding on the people who sign it, as opposed to the company\u2019s constitution<\/a>, which applies to all shareholders under the Companies Act 2006<\/strong>.<\/p>\n\n\n\n

<\/span>Investment Tranches<\/span><\/h2>\n\n\n\n

Another unique component of investment agreements, which allows for the part-payment of investment to a business by investors over time, is Investment Tranches.<\/strong><\/p>\n\n\n\n

With \u201cTranche\u201d retaining its French meaning for \u2018slice\u2019, this strategic mode of venture capital transfer falls under Structured Financing, <\/strong>which describes how businesses can divide potentially risky financial products into loans.<\/p>\n\n\n\n

If the investor does not make the entire investment in the company at one time, the investment funds may be paid in specified amounts at specified periods of time. These payments are known as tranches.<\/p>\n\n\n\n

It is common in startup companies<\/a> for investors to commit to capital investment at various company milestones. The tranches are generally tied to product development, revenue targets, or other operational metrics.<\/p>\n\n\n\n

While constructing an investment agreement, you may utilise a Preference Shares Investment Agreement<\/strong><\/a> <\/strong>template to incorporate multiple tranches of completion, thus giving way for greater investment earnings as the company progresses.<\/p>\n\n\n\n

<\/span>Investment Warranty<\/span><\/h2>\n\n\n\n

Following an investment tranche, the company may make an investment warranty as an explicit representation that statements made by the warrantor are true and accurate on the completion date.<\/p>\n\n\n\n

The representations and warranties generally list company conditions that will be examined through due diligence.<\/p>\n\n\n\n

These may concern the financial position (accounting and tax representations), company assets (ownership and valuation), ownership structure, operational characteristics, and the company\u2019s legal situation.<\/p>\n\n\n\n

<\/span>Examples of typical warranties<\/strong><\/span><\/h3>\n\n\n\n