Overview
When an investor chooses to invest in a company, there will be a variety of ways for the relationship between the investor and the company to be documented. The actual choice of type of investment agreement, and its contents, will depend on a number of factors including the nature of the investor – whether it is an institutional private equity investor or an individual, for example – and the relationship between the parties.
Generally speaking, the most common scenario at play here is that of an investment structured by way of the investing party taking shares in the relevant company, and his/her rights and obligations regarding conduct of the company (and likewise the rights and obligations of the other shareholders, and the directors) being recorded in some form of shareholders agreement – which can also be referred to as an investment agreement and a subscription agreement. There are differences between these types of document but the terms are often used interchangeably – and not always correctly.
In many circumstances an investment is made party in shares (ie a payment made for shares in a company) and partly in debt (ie a loan to the company, repayable to the lender/investor). In some cases loans are made which are convertible into shares, ie can be turned into shares at the request of the lender.
The investment agreement
It follows from the above that there is not a single structure of document that governs all investments, nor is there is standard list of matters included in an investment agreement. There are some common threads, however, which appear in many agreements and structures. These include:
- A list of matters which the company may not undertake, post-investment, without the consent of the investor
- A list of financial information to be supplied to the investor on a regular basis allowing them to monitor financial performance of the business
- A right for the investor to nominate an individual (whether the investor himself or not) to sit on the board of directors of the company
- A series of provisions governing rights and obligations in relation to the transfer of shares in the company, including a variety of circumstances wherein a shareholder may be obliged to transfer his or her shares to the other shareholders, and describing the price to be received on such transfer
Key issues
A practical and pragmatic approach is needed to negotiating investment documents, which is based on the nature of the commercial relationship which the parties (company, investor, directors and management team) have agreed to have. The scope of the legal documents should, for example, reflect whether the investor will be involved ‘hands-on’ to any material degree, or will be a passive investor with protections but little actual involvement in the business.
Your advisors should base the legal documents around these commercial realities from the outset. If done correctly, investment documentation simply amounts to a set of outline rules of conduct which do not impinge on the effective and smooth operation of the business.
