Summary
- An investment agreement governs the specific terms of a funding transaction (including capital amount, valuation, securities issued, conditions precedent, and warranties), whilst a shareholders’ agreement governs the ongoing relationship between shareholders covering voting rights, board structure, share transfers, profit distribution, and exit guidelines, with both operating within the framework of the Companies Act 2006.
- Both agreements must be read alongside the company’s articles of association, which are filed with Companies House and take precedence over a shareholders’ agreement for matters governed by the Companies Act 2006, making it essential to review and amend the articles before finalising either agreement to avoid legal uncertainty.
- Amendments to the articles of association require a special resolution passed by at least 75% of shareholders, and new investors will often require such amendments as a condition of investment, making early planning and legal advice essential when preparing for a funding round.
- This article is a guide to investment agreements and shareholders’ agreements for startup founders in the UK, explaining the key differences between the two documents, their legal implications under the Companies Act 2006, and how they interact with a company’s articles of association.
- LegalVision is a commercial law firm that specialises in advising clients on startup law, corporate governance, and investment transactions.
Tips for Businesses
Review your articles of association before finalising any investment agreement or shareholders’ agreement to identify and resolve potential conflicts, as the articles will generally take precedence for matters governed by the Companies Act 2006. Include a clause in your shareholders’ agreement requiring the parties to update the articles if a conflict is identified, and factor the time required for a special resolution into your funding round timeline. Engage a lawyer to draft and negotiate both documents simultaneously to ensure they are consistent with each other and with your articles of association.
An investment agreement and a shareholders’ agreement are two distinct legal instruments that together form the backbone of a startup’s capital and governance structure. In the United Kingdom, both documents operate within the framework of the Companies Act 2006, which sets out the rights and obligations of companies, directors, and shareholders. Companies House maintains the public register of corporate documents, making it essential that these agreements align with statutory requirements. While neither document requires a prescribed form under the Act, both must reflect the agreed commercial terms and satisfy general contract law principles to be enforceable. This article will further explain the critical differences between these agreements, their legal implications, and the importance of seeking expert legal advice when drafting them.
1. Purpose and Scope
The following table outlines the key differences between investment agreements and shareholder agreements regarding their purpose and scope.
| Investment Agreement | Shareholders Agreement | |
| Definition | An investment agreement is a contract between a company and its investors. It details the terms and conditions of the investment. | A shareholders’ agreement is a contract among the shareholders of a company. It outlines the rights, responsibilities and obligations of each shareholder. |
| Scope | An investment agreement focuses on the specifics of the investment transaction, detailing aspects such as the amount of investment and each party’s rights and obligations. | A shareholders’ agreement governs the ongoing relationship between the shareholders and the company’s management. It details crucial frameworks in a company’s governance, such as decision-making processes, the transfer of shares process, and dispute resolution mechanisms. |
Founders typically draft an investment agreement during funding rounds when seeking capital from investors. You will draft a shareholders’ agreement whenever multiple shareholders are in your company. This agreement helps to ensure smooth governance among numerous stakeholders. You usually draft a shareholders’ agreement during your company’s formation or a significant funding round when you obtain equity investment.
2. Key Investment Provisions
These two types of agreements differ significantly in their contents. For example, key provisions of an investment agreement include the following:
- details of the amount of capital you will receive and the valuation of your company;
- the type of securities issued, such as equity or convertible notes;
- the conditions that parties must meet before the investment is complete, such as due diligence; and
- statements from the company and its investors about the condition of the business and the accuracy of the information they have provided.
Alternatively, key provisions of a shareholders’ agreement include the following:
- details of voting rights and the process for making significant decisions;
- the structure of the board of directors;
- rights of shareholders to appoint or remove directors;
- the procedures for selling or transferring shares;
- the company’s policy on the distribution of profit among shareholders; and
- exit guidelines.
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3. Legal Investment Implications
Both agreements are legally binding and create obligations for the parties involved. An investment agreement, for example, obligates parties to complete the transaction according to the agreed-upon terms.
A shareholder agreement requires parties to act as per its terms in their capacity as shareholders in the company. This agreement governs the relationship between shareholders over the long term. It provides stability and clarity in operations. Moreover, the dispute resolution mechanisms within this contract can help prevent costly litigation and unnecessary disruptions to your startup’s operations.
Seeking expert legal advice when drafting and negotiating these agreements can be critical. Both can contain complex legal provisions that significantly impact your business’s operations and your relationship with investors. A lawyer can:
- help you review the terms, ensure they are fair, and protect your interests;
- clarify your obligations;
- identify potential risks and help you mitigate them;
- negotiate with investors and shareholders on your behalf; and
- Tailor the agreements to suit your startup’s specific needs.
What Happens If These Agreements Conflict With Your Articles of Association?
Both agreements must be read alongside your company’s articles of association. If there is a conflict between them, this can create serious legal uncertainty. Under the Companies Act 2006, a company’s articles of association are a registered document filed with Companies House that bind the company, its directors, and all shareholders. A shareholders’ agreement, by contrast, is a private contract. It is not filed with Companies House and only binds the parties who sign it.
Where a conflict arises, the articles of association will generally take precedence for matters governed by the Companies Act 2006. However, the shareholders’ agreement may still be enforceable as a contract between the signing parties.
To avoid this problem, you should:
- review your articles of association before finalising either agreement;
- amend your articles where necessary to reflect the agreed terms; and
- include a clause in the shareholders’ agreement confirming that the parties will update the articles if a conflict is identified.
New investors will often require your articles of association to be amended as a condition of their investment. Any amendment requires a special resolution passed by at least 75% of shareholders. Factor this into your timeline when planning a funding round.
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Key Takeaways
Understanding the differences between an investment agreement and a shareholders’ agreement is essential for any startup founder. With this knowledge, you can navigate the investment process and build a solid foundation for your startup’s growth. Although you may draft them simultaneously, the two documents are distinct. While the investment agreement focuses on the specific terms of the transaction, the shareholders’ agreement governs the ongoing relationship among shareholders and your company’s management. Both documents should protect your interests and ensure clear communication among interested parties.
If you need help drafting an investment agreement or a shareholders’ agreement, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced startup lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What is the difference between an investment agreement and a shareholders’ agreement?
An investment agreement outlines funding terms, while a shareholders’ agreement governs the rights and responsibilities of shareholders and company management.
Do I need both agreements when raising capital?
Yes, the investment agreement covers the funding terms, and the shareholders’ agreement outlines governance and shareholder relationships.
How does a shareholders’ agreement help prevent disputes?
It includes dispute resolution mechanisms that prevent costly litigation. It also provides long-term stability and clarity in company operations.
What role does a lawyer play when drafting these agreements?
Lawyers review terms, identify risks, and negotiate on your behalf. They also tailor both agreements to suit your startup’s specific needs.
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