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Difference between SSA & SHA: A Comprehensive Guide

Introduction: What is SSA and SHA?

A private company that wants to develop its business can do so by raising funds. To do so, it can approach an investor. When a company chooses to approach an investor, it is probable that the investor will receive shares of the company in exchange. It is important to recognize the distinctions between a share subscription agreement and a share purchase agreement at this point. In the lifecycle of a private company, especially during fundraising or restructuring phases, two critical legal documents often come into play: the Share Subscription Agreement (SSA) and the Shareholders Agreement (SHA). Although both relate to company shares, they serve distinct yet complementary purposes.

The SSA focuses on the process of acquiring shares by investors, typically involving the issuance of new shares to bring capital into the company.

In contrast, the SHA governs the rights, responsibilities, and relationships among shareholders after the investment has been made.

Also Read: Reduction of Share Capital through NCLT Approval

While these agreements are sometimes combined into a single investment document, it is generally recommended to keep them separate for the sake of legal clarity and precision. Understanding the scope, content, and use cases of both agreements is essential for entrepreneurs, investors, and legal professionals navigating the early stages of a company’s development.

Share Subscription Agreement (SSA)

A Share Subscription Agreement is a legal contract between a company and an investor in which the investor agrees to subscribe to (i.e., purchase) a certain number of new shares issued by the company at an agreed-upon price. This agreement outlines the terms of the investment and ensures both parties are aligned on the commercial and legal parameters of the transaction.

Parties Involved in the Agreement: Issuer Company & Proposed Subscribers or Investors.

Key Objectives of an SSA:

  • Provide a clear framework for the investor’s entry into the company.
  • Prevent ambiguity or disputes during or after the investment process.
  • Outline the terms under which an investor agrees to purchase a defined number of shares at an agreed price.

When is a Share Subscription Agreement (SSA) Required?

The SSA protects both the investor and the company by clearly documenting the terms of the investment. It prevents disputes by ensuring mutual understanding and compliance with regulatory frameworks. This agreement’s primary goal is to compel both parties to complete the investment procedure without any ambiguity at a further stage.

An SSA becomes crucial:

  • When a company raises capital from private investors.
  • To ensure the investor becomes a legitimate shareholder under clearly defined conditions.
  • To protect both parties with defined roles, rights, and obligations.

Key Contents of a Share Subscription Agreement (SSA)

  • Parties to the Agreement: Names and details of the company and the investor(s).
  • Definitions & Interpretation: Clarification of key terms used in the agreement.
  • Term of the Agreement: Duration and validity of the agreement.
  • Shareholding Structure: Details of who owns what percentage of the company before and after investment.
  • Subscription of Investor Securities: Number and type of shares the investor will receive.
  • Conditions Precedent: Requirements to be fulfilled before the deal is finalized (e.g., regulatory approvals).
  • Closing Procedures: Steps to be followed to complete the transaction.
  • Representations & Warranties: Legal promises made by the company and investor about their authority and financials.
  • Covenants: Ongoing commitments made by either party (e.g., not taking certain actions without consent).
  • Indemnification Provisions: Rules for compensating a party in case of losses due to breaches.
  • Termination and Default Clauses: Conditions under which the agreement can be ended.
  • Specific Performance Obligations: Legal promise to fulfill contract terms if one party defaults.
  • Notices: How formal communications should be exchanged between the parties.
  • Governing Law: Legal system or jurisdiction under which the agreement will be interpreted.
  • Dispute Resolution Mechanisms: Method to resolve disagreements (e.g., arbitration).

Shareholders’ Agreement (SHA)

A Shareholders Agreement is a broader governance document entered into by the shareholders of a company (often including the company itself). It is a binding legal contract between a company and its shareholders that outlines how the company will be governed, and the rights and obligations of shareholders. It ensures smooth day-to-day operations and long-term governance by regulating ownership, management, and transfers of shares.

When Is a Shareholders Agreement (SHA) Required?

An SHA helps avoid conflicts among shareholders, especially between founders and investors, by laying down clear rules for decision-making, ownership transfers, and dispute handling. It is crucial for ensuring corporate stability and investor confidence.

An SHA is essential when:

  • Multiple founders or investors are involved in a company.
  • There is a need to clearly define each shareholder’s rights and roles.
  • The company seeks long-term operational clarity and conflict-prevention mechanisms.

Even if a company has Articles of Association, an SHA supplements it with shareholder-specific clauses.

Contents of a Shareholders Agreement (SHA)

  • Details of the Parties: Names and shareholder details involved in the agreement.
  • Authorized Capital: Total share capital the company is allowed to issue.
  • Shareholding Structure: Who owns how many shares and their ownership percentage.
  • ROFR – Right of First Refusal:
    This gives existing shareholders the right to refuse or accept the purchase of shares before the selling shareholder offers them to an external party. It helps maintain control within the current shareholder group and avoid unwanted third-party ownership.
  • ROFO – Right of First Offer:
    This requires the selling shareholder to first offer their shares to existing shareholders before seeking external buyers. If no shareholder is interested, the seller can then negotiate with outsiders, but usually on terms not more favourable than those offered internally.
  • Drag-Along Rights: Majority shareholders can force minority shareholders to sell their shares during a full company sale.
  • Tag-Along Rights: Minority shareholders can join in if majority shareholders sell their shares.
  • Director and Board Provisions: Rules about who gets to appoint directors and how the board is structured.
  • Management of the Company: Decision-making responsibilities and how day-to-day operations are handled.
  • Non-Compete and Non-Solicit Clauses: Prevents shareholders from starting rival businesses or poaching employees.
  • Reserved Matters: Special decisions (like mergers) that require prior shareholder approval.
  • Termination Clauses: When and how the agreement ends.
  • Dispute Resolution Mechanisms: How conflicts between shareholders will be resolved.

Important Points While Drafting SSA & SHA

SSA Drafting Considerations:

  • Precise Investment Terms: Clearly state number, price, and type of shares.
  • Conditions Precedent: Ensure legal and regulatory compliance is listed.
  • Representations & Warranties: Include truthful statements about financials, IP, and compliance.
  • Consistency with SHA: Avoid conflicting clauses between SSA, SHA, and AoA.
  • Indemnity Clauses: Address potential liability and protections explicitly.

SHA Drafting Considerations:

  • Custom Governance Rules: Tailor board structure and voting thresholds to suit the business.
  • Transfer Restrictions: Define ROFR, ROFO, and lock-in periods clearly.
  • Exit Provisions: Outline IPO, buyback, and sale scenarios in detail.
  • Minority Protections: Include veto rights or special voting rights, if needed.
  • Dispute Resolution: Prefer arbitration for speed and confidentiality.

SSA vs SHA: Key Differences

Feature

Share Subscription Agreement (SSA)

Shareholders Agreement (SHA)

Main Objective

Investment terms for new shares

Governance and shareholder relations

When Signed

At the time of new investment

Concurrently with or after investment

Primary Parties

Company and investor(s)

Shareholders (including founders, investors)

Legal Nature

Transactional document

Corporate governance contract

Focus

Capital inflow

Rights, duties, and corporate control

Conclusion

In essence, while both SSA and SHA are integral to corporate structuring, their purposes differ:

  • An SSA governs the process of investment, ensuring clarity in the issuance or transfer of shares.
  • An SHA governs post-investment relationships among shareholders, ensuring harmony and clarity in decision-making.

For any growing business or investor, both documents are not just legal necessities but strategic tools for sustainable growth, proper governance, and risk mitigation.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.

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