Investment Agreement and Shareholders Agreement: Main Differences

What Are the Differences Between Investment Agreement and Shareholders Agreement?

When a business raises money, they may need several legal agreements for their investment transactions. An investment agreement and a shareholders agreement are two broadly misunderstood legal documents. Telling the difference between the two would integrate investors’ investment activities and secure ownership rights for the company.

With that, read the elucidations below to learn more of the major differences between an investor agreement and a shareholders agreement.

 

What Is an Investment Agreement?

Investment agreements are contracts between an investor and the company. This document spells out the contract terms of the investment treaty. Thus, securing an investment agreement is essential since it covers the main terms of the transaction. These terms include:

• The business and investor details;
• The amount of investment;
• Any requirements related to the investment;
• The acts that each entity should take to fulfil the agreement; and
• The claims, representations, and warranties.

 

What Is a Shareholders Agreement?

A shareholder agreement is an arrangement made by a company and its shareholders. This document oversees the partnership between the shareholders and the company. It also lays out the company’s framework for business decisions.

Five of the main features protected by the shareholder arrangement are:

• Decisions made towards shareholders by directors;
• Who can nominate shareholders;
• When to issue new company shares;
• When can shareholders sell shares; and
• What details the business needs to impart to shareholders.

 

How Do They Differ?

Investment agreement and shareholders agreement are vastly different. They cover important components and pursue different objectives. Below are some of the differences between an investor agreement and a shareholders agreement.

Purpose

First, the major difference between an investment agreement and a shareholders agreement is its purpose. An investment agreement discloses the conditions of the partnership through the investment made.

While a shareholder agreement’s purpose is to decide the partnership between the shareholders and the company, it also sets up a policymaking process that will affect the deal terminates.

Subject Matter

Another significant difference between an investor agreement and a shareholder agreement is its subject matter. The provisions of an investment deal are limited to the underlying agreement itself. Furthermore, the document would usually not have words that influence the organization’s daily activities or decision-making.

Whereas a shareholder contract controls how decisions are taken continuously by the company. Also, it doesn’t make use of the provisions of any particular business transaction.

Rights of Investors

There’s also a thick line between an investor agreement and a shareholders agreement regarding the rights of investors. An investment agreement would carry down the commitments of the company to its investors. Generally, it would not enable the client to have any say irrelevant to individual investment in business decisions.

On the other hand, a shareholder arrangement lays down the responsibilities of the company to its shareholders. Any important decisions, particularly those related to the business’s shares, would mean shareholder involvement.

Parties

Lastly, the parties involved are another major difference between an investor agreement and a shareholder agreement. The investor and the company are the parties that enter into an investment agreement.

Contrastingly, the parties involved in a shareholder agreement are the company and all their shareholders. Also, the company has the right whether to include the investors or not. It depends on whether the investor, as a benefit of their investment, becomes a shareholder.

 

The Bottomline

Investment agreement and shareholders agreement hold different functions. While both of them are essential, one can’t assume the other’s function.

According to Hong Kong Incorporation Experts, a business organization must have a shareholder agreement. It sets out all the parameters of the business’s partnership with its shareholders. Moreover, it is not a contract statement and would not discuss the unique transaction requirements.

Similarly, it’s equally essential to create a suitable investment agreement. This would record the provisions of the investment transaction.

Contact 3E Accounting Hong Kong if you need help in drafting your shareholder agreement or investment agreement.