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Major Clauses of a Shareholders' Agreement Decoded
Therefore, before initiating the drafting of SSA, SPA or SHA, it is necessary to understand certain basic differences, clauses and concepts related to these complex transactional agreements.
Difference Between Share Subscription Agreement, Shareholders’ Agreement and Share Purchase Agreement
Share Subscription Agreement – In simple terms, when an investee company issues new securities to any new incoming investor or an existing investor of such investee company, then an SSA is executed between such parties. Such investment is subject to fulfilment of certain conditions precedent as well as subsequent to the receipt of investment amounts which are duly inserted in the SSA for securing the interests and investment of the investor. Share Purchase Agreement – Unlike the SSA, an SPA is entered into when the new investor or the existing investor wishes to purchase the existing securities of the investee company. Shareholders’ Agreement – An SHA governs the relationship between new investor or investors, existing investor or investors, other shareholders, founder or founders of the investee company and the investee company. It is a comprehensive document which mainly focuses on the management and control of investee company between the aforesaid parties.Major Clauses and / or Concepts Related to an SHA
- Anti-Dilution and Pre-emptive Right of Investors
- Anti-Dilution Right
- Pre-Emptive Right of Investor
- Vesting and Reverse Vesting of Shares
- Vesting of Shares
- Reverse Vesting of Shares
- Drag Along and Tag Along Rights
- Drag-Along Right
- Tag-Along Right
- Right of First Refusal and Right of First Offer
- Right of First Refusal
- Right of First Offer
- Firstly, the main object of these rights is to prevent the transfer of shares to any external third-party buyer against the wishes of non-disposing investors; and
- Secondly, these rights ensure benchmarking of a ‘floor price’ below which the Sale Shares cannot be transferred to the external third-party buyer if not the existing non-disposing investors.