What is a Share Subscription Agreement?
In general terms, a Share Subscription Agreement is the binding legal contract through which an investor (the Subscriber) commits to purchasing newly issued shares in a company, and the company commits to issuing those shares.
It typically sets out the price, the conditions that must be satisfied before the shares are issued, the warranties each party gives, what happens at completion, and what happens if things go wrong.
Why is this important?
For social enterprises seeking equity investment, the Subscription Agreement is where the deal becomes real.
It creates the binding obligation to complete and may link the use of the investment funds to the Company's Mission, ensuring the capital raised is applied towards the social or environmental purposes for which it was sought.
How does the Share Subscription Agreement relate to the other Toolkit documents?
While the Term Sheet records what has been agreed in principle and the Shareholders Agreement governs the ongoing relationship between Shareholders for the life of the investment, this Share Subscription Agreement is the document that makes the investment legally effective.
It gives those commercial terms legal force and establishes the conditions, warranties, and mechanics through which the shares are actually issued and the investment funds are received by the Company.
The subscription: what is being bought?
In legal terms, a "subscription" simply means an agreement to buy newly created shares (as opposed to buying existing shares from another shareholder). The "Subscription Price" is the total purchase price the investor pays for those shares.
Subject to the conditions precedent being satisfied, the Subscriber agrees to subscribe for shares in the Company. The specific number of shares, and the price per share, are set out in Schedule 1.
Conditions precedent
A "condition precedent" is a legal term for something that must happen before the parties' obligations kick in. Think of it as a checklist: every item on the list must be ticked off (or formally excused) before the investment can proceed to completion. If any item is not satisfied, the deal may not proceed.
What must happen before completion?
The obligations of the parties will have no effect unless and until each of the following conditions precedent have been satisfied or waived in writing on or before the Completion Date:
- the Transaction Documents having been duly executed by all parties;
- the Shareholders have passed all resolutions and given all consents or waivers required (including under the Company's constituent documents and the Corporations Act) to give effect to the issue of the Subscription Shares, including obtaining any waiver of pre-emptive rights applicable to the issue; and
- any specific conditions the parties agree to insert.
Users should consider what conditions may be appropriate for their particular transaction and seek legal advice on this point.
Pre-emptive rights
If the Company already has an existing investor, that investor may have the right to take up the new shares first. If those rights exist and are not formally waived, the conditions precedent may not be satisfied and Completion may not be able to occur.
Users should check the Company's constitution and any existing Shareholders Agreement and seek legal advice on whether pre-emptive rights need to be addressed.
Completion
"Completion" is the legal term for the moment the transaction is finalised, when the money is paid and the shares are issued. It is the point at which the investment actually takes effect.
When and how does Completion occur?
Completion will take place electronically at the agreed time on the Completion Date, or at another time and place agreed by the parties. All actions and documents to be delivered at Completion are interdependent and deemed to occur simultaneously so that neither the payment nor the share issue can take effect without the other.
What must the Company do at Completion?
Subject to the Subscriber complying with its obligations, the Company must:
- deliver evidence that its directors have resolved to approve the issue of the Subscription Shares, the entry of the Subscriber's name in the register of members, and the issue of a Share Certificate;
- issue the Subscription Shares;
- enter the Subscriber's name in the register of members;
- deliver a Share Certificate;
- deliver copies of all Transaction Documents duly executed; and
- deliver the Constitution as in force on the Completion Date.
What if Completion does not occur?
If Completion does not occur because a party has not satisfied its obligations, any non-defaulting party may give written notice requiring the default to be remedied. If the default is not remedied within 5 Business Days (or such other period as agreed), the non-defaulting party may terminate. The specific operation of this clause will depend on the circumstances.
Use of funds
The Subscription Price is to be used for a specific purpose and otherwise in accordance with the Mission.
This provision is particularly important for social enterprise investments as it provides the Subscriber with a contractual basis to ensure that the funds invested are directed towards the purposes for which the investment was made.
Warranties
What are warranties?
Warranties are factual statements a party makes to the other about its current circumstances, for example, "the company is solvent" or "the company has complied with all applicable laws." They confirm the current position and form part of the basis on which the other party has agreed to enter into the transaction. If a warranty turns out to be materially incorrect, the party that gave it may be liable for breach.
Subscriber's warranty
The Subscriber represents and warrants that it is a "Sophisticated Investor" or "Professional Investor" for the purposes of the Corporations Act. This is relevant because, as a general proposition under Australian law, a company issuing shares must generally provide a formal disclosure document (such as a prospectus) to investors, unless the investor falls within certain exemptions.
If the Subscriber does not fall within one of these exemptions, the Company may need to prepare a disclosure document, which is beyond the scope of this template and Toolkit. Users should seek independent legal advice to confirm whether these exemptions apply to their specific circumstances.
Company's warranty
The Company represents and warrants that each Company Warranty listed in Schedule 3 is true and correct and not misleading as at the date of the agreement and as at the Completion Date. The scope and breadth of Company Warranties is a matter for negotiation between the parties having regard to the specific circumstances of the transaction. Specific warranties may be requested by an investor to reflect due diligence findings. Independent legal advice should be sought on the appropriate scope for your transaction.
Warranty limitations
The template includes several standard limitations on the Company's liability for breach of warranty:
- Fair disclosure defence: if the Company has told the Subscriber about a problem before signing, the Subscriber may not be able to later claim for breach of warranty in relation to that same problem. This incentivises the Company to disclose issues early and comprehensively.
- Time limit: the Company may have no liability for a warranty claim unless the Subscriber gives written notice within 24 months after the Completion Date.
- Minimum thresholds: the Company may not be liable unless the amount of the individual claim exceeds certain thresholds, which are included as placeholders and are a matter for commercial negotiation.
- Overall cap: the maximum aggregate liability of the Company for all warranty claims is not intended to exceed the Subscription Price. The Company is also not intended to be liable for Consequential Loss.
- No limit for fraud: nothing limits the Company's liability for fraud or wilful misconduct.
Note: In some transactions, the investor may request specific indemnities to cover particular risks identified during due diligence (for example, a pending tax liability or an unresolved contractual dispute). Unlike warranties, which are general statements about the state of the business, a specific indemnity is a promise by the Company to compensate the investor for the full amount of loss if an identified risk materialises. Where specific indemnities are agreed, the standard warranty limitations (including time limits, minimum thresholds, and liability caps) will generally not apply, as the Company has actual knowledge of the issue and has agreed to bear the financial consequence if the risk eventuates.
Post-completion capital structure (Schedule 2)
Schedule 2 sets out the shareholding structure immediately after Completion, who holds what, and in what proportions, once the new shares have been issued.
Shareholders Agreement (Schedule 4)
Schedule 4 is where the agreed form of the Shareholders Agreement is attached for cross-reference.
The purpose of attaching the Shareholders Agreement as a schedule is to ensure there is no ambiguity about which version of the Shareholders Agreement was agreed between the parties at the time the Subscription Agreement was executed. This is particularly important if the Shareholders Agreement is being negotiated in parallel with the Subscription Agreement, attaching the final agreed form is intended to reduce the risk of a party later arguing that a different version was agreed.
What does this agreement deliberately not cover?
This template is designed as a straightforward share subscription for an unlisted social enterprise. To keep it accessible, the following matters are generally not addressed:
- Anti-dilution protections: relevant only if preference shares are issued (the Toolkit contemplates ordinary shares only).
- Escrow or milestone-based payment: where the Subscription Price is paid in tranches against milestones.
- Disclosure document: the template assumes the Subscriber is a Sophisticated or Professional Investor, so no prospectus or disclosure document is required.
- Foreign Investment Review Board (FIRB): if the Subscriber is a foreign person, additional regulatory approvals may be required.
- Mandatory Merger Regime: the template assumes the transaction does not meet the turnover or transaction value thresholds requiring mandatory notification to the Australian Competition and Consumer Commission (ACCC) prior to completion.
- Due diligence process: the due diligence framework is dealt with in the Term Sheet; the Subscription Agreement assumes it has been completed by the time of execution.
- Indemnities: unlike the Impact Loan Agreement, this Subscription Agreement does not include a general indemnity regime (the warranty limitations serve as the primary liability framework). An investor may request specific indemnities to cover particular risks identified during due diligence and where these are agreed, the standard warranty limitations in this template will generally not apply to those indemnities.
These are intentional design choices to keep the template accessible. Users who require any of these features, or who are uncertain whether any of these matters may be relevant to their transaction, should seek independent legal advice.
Download the template
The Share Subscription Agreement template is available to download below. Review with your legal adviser before use.