Understanding Investment Agreements, Shareholder Agreements, and Shareholder Resolutions: A Comprehensive Guide

When starting or investing in a business, it is crucial to understand the distinctions and roles of investment agreements, shareholder agreements, and shareholder resolutions. These documents serve different purposes and provide varying levels of detail and control over the business operations and ownership. This guide will clarify each of these agreements to help entrepreneurs and investors make informed decisions.

What is an Investment Agreement?

An investment agreement, also known as a share subscription agreement, is a legally binding document that is usually drafted when an investor decides to join a business. This agreement defines the terms of the investment, the amount to be invested, the purchase of shares, and any conditions or tranches of the investment.

Key components of an investment agreement typically include:

The terms of the investment The total amount of investment and any tranches Conditions to funding future tranches What the investor receives in return, such as share ownership and protections against dilution Additional terms, such as mandatory board representation

What is a Shareholder Agreement?

A shareholder agreement is an important contract that outlines the rights and obligations of the shareholders of a company. This is particularly crucial when two or more shareholders are involved in a business, especially when a new shareholder is introduced.

Key elements to include in a shareholder agreement:

The respective shareholdings and classes of shares of each shareholder Dilution rights Vesting clauses and cliff periods Time and attention requirements from shareholders Protection against the assignment of intellectual property Handling conflicts of interest Non-compete clauses Tag along and drag along rights for easier business sale Right of first refusal if a shareholder wishes to sell shares Deadlock provisions Voting powers and dividend policies Provisions for share transfer and compulsory transfer upon death Provisions for issuing further shares

What is a Shareholder Resolution?

A shareholder resolution is a formal decision made by the board of shareholders during a meeting and documented in writing. Depending on the company's articles of association and local laws, some decisions may require a 50% or 75% majority.
A shareholder resolution may include:

Electing new directors Approving mergers Amending the articles of association Any other specific action required by the shareholders

Conclusion and Further Assistance

While the contexts and industries might vary, the terminology and legal requirements for these agreements can differ significantly. Understanding the nuances between an investment agreement, a shareholder agreement, and a shareholder resolution is vital for the smooth operation of any business. If you need further legal guidance, Linkilaw offers a free Startup Legal Session. For more details on startup requirements, visit our blog.