Overview of a Preference Shares Investment Agreement

What is a Preference Shares Investment Term Sheet?

Preference Shares Investment Agreement is a contract for an investor to invest in a company and get preference shares in return. Please note: investment by preference shares is highly sophisticated. If you are not familiar with how preference shares work or how this investment agreement operates, you must seek legal advice.

It is crucial that, at an early stage of the discussion, the parties have a good idea of the rights attached to (or any restrictions that apply to) the preference shares. Major rights that may be attached to preference shares include:

  • a fixed rate of dividend;
  • liquidation preference (i.e. getting paid ahead of other shareholders on any liquidation of the company), which could be a sum that represents an agreed rate of annual return on capital;
  • extra voting rights;
  • redemption right at a certain time or upon certain events;
  • conversion (into ordinary shares) at any time or upon certain events; and
  • anti-dilution protection (common choices are full ratchet, narrow based weighted average ratchet, and broad based weighted average ratchet).

Always bear in mind there is not a single set of rights or restrictions that is universal. Each provision is a matter of negotiation; therefore it is important for you to understand the provisions and to negotiate them with the counterparty where appropriate.

In this Preference 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);
  • simple standard warranties; and
  • simple standard (sometimes called “plain vanilla”) provisions on the rights attached to preference shares.

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 preference shares.

Key Points Included:

  • 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;
  • Details of the issued share capital of the company, including any convertible securities or employee share options in place; and
  • Rights and restrictions of the preference shares to be issued.

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