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COMMON TYPES OF CORPORATE AGREEMENTS

  • Company’s Constitution
  • Founders’ Agreement
  • Shareholders Agreement
  • Share Subscription Agreements
  • Term Sheets
  • Share Purchase Agreement
  • Business Sale & / Assets Agreement
  • Directors’ Service Agreement
  • Types of Resolutions : Directors Resolutions & Members Resolutions

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Company’s Constitution

 Company Constitution is a formal document that sets out the rules governing a company. It also defines the relationship between the company, shareholder(s), director(s) and other officers of the company. According to the Companies Act 2016, it is not compulsory for a company to have a constitution on the basis that all necessary guidelines for the administration of a company are addressed by the Companies Act 2016, which will in effect serve as the company’s constitution. However, if you do not want certain provisions under the Companies Act 2016 to apply, then it is encouraged for a company constitution to be adopted.

Where preference shares are to offered by a company for subscription by an investor or investors, a preference shares term sheet will set out the terms and conditions of investment by the investor on the preference shares. This includes the issue price per preference share issued, return on investment (i.e. dividend rate), payment of dividend, convertible options to ordinary shares, maturity date, redemption terms, etc. These terms are then incorporated into the Constitution of the Company.

Founders’ Agreement 

A Founders’ Agreement is an agreement entered into between the founders of a company in that it regulates the business relationships between the founders. It usually lays out the terms such as roles and responsibilities of the founders, capital contribution, ownership structure, equity transfer and restrictions, decision-making, resignation and removal of founders, confidentiality issues and dispute resolution.

Shareholders’ Agreement

A Shareholders’ Agreement is an agreement between shareholders and the Company in that it outlines the agreement between the shareholders on how to regulate the affairs of the company, details regarding ownership and their respective rights and obligations, share transfer restrictions and also terms in respect to the management, operations and affairs of the company. A Shareholders’ Agreement typically also consists of provisions on privileges and protection of shareholders.

A shareholders agreement & a share subscription agreement are regularly executed simultaneously. However, these two agreements have key differences in their respective nature. All shareholders of the company will be required to sign the shareholders’ agreement, which contrasts to a share subscription agreement that is only entered between the investor/subscriber and the company.

Share Subscription Agreements

When an investor has agreed to invest in a company by a subscription of shares, a share subscription agreement (“SSA”) is entered into between the investor (also referred to as “subscriber”) and the company. The SSA acts as a promise by the company that it will issue a certain number of shares to the investor at a specific price. The SSA will commonly set out the amount of investment sum in exchange for the number of subscribed shares in the company. Other terms of the agreement include the subscription date on which the investor must pay the subscription price for the shares and/or the date on which the investor may convert or redeem (as the case may be) such shares in circumstances that involve redeemable convertible preference shares.

It is common for companies seeking investors to firstly issue a term sheet setting out the type of shares being offered and investment structure. The term sheet also refers to an outline of provisions typically captured under the SSA.

Term Sheet 

A Term Sheet is a document that briefly outlines the basic terms and conditions of an investment. It lays a foundation for ensuring that the parties involved come to a consensus on the material aspects of the investment. Similar to a letter of intent, a term sheet is usually non-binding on the basis that it is not a final agreement signed by the parties. A term sheet is commonly used by professional advisors such as lawyers as guidance in the preparation of the final agreement of which after it has been negotiated and signed by the parties, it becomes an official binding document.

Term Sheets are useful in several commercial negotiations, including investments, licensing, resellers agreements and joint ventures. The benefit of a Term Sheet is that they ensure both parties understand the commercial terms of the resulting agreement.  They can also save legal costs associated with drafting a fully binding agreement at the negotiations stage that may or may not be entered into.

If the resulting agreement is entered into on terms less favourable to one party, that party will generally be unable to enforce the more favourable terms contained in the Term Sheet. Moreover, a large company will often bring a pre-prepared or “standard form” Term Sheet to a negotiation, and the other party may feel that they are not in a position to negotiate its terms. Finally, as a Term Sheet is usually non-binding, either party can leave the negotiations at any time, meaning any time and money expended during the period of negotiation will be lost.

You should understand what your position is when you are negotiating an agreement with a term sheet. While this is unlikely to create a binding agreement, your intention and the other party’s intention may be different. It is important to understand the legal effect of using a term sheet and its consequences; one should not provide a term sheet intending it to be the full and final contract.

Share Purchase Agreement 

A Share Purchase Agreement sets out the terms and conditions about the sale and purchase of shares in a company between a seller and a buyer. The agreement usually covers information concerning the seller and the buyer, the number of shares that are being sold, selling price, timing for the transfer of the shares, covenants and undertakings of the seller, representations and warranties of the seller and provisions about termination of the agreement.

Business Sale & Asset Sales Agreement 

While a business sale agreement is used in the sale of a business as a whole, an Asset Sale Agreement is used when it involves the sale of specific assets of a business. An asset sale agreement can be used whether it involves a sale of tangible assets such as equipment, property or inventory, or a sale of intangible assets such as business’ goodwill, intellectual property or contracts.

Directors’ Service Agreements 

Directors have significant powers and responsibilities in the management, operation and running of a company. Hence, it is fundamental to set out the rights and obligations of a director in a legally binding agreement that governs and underpins the relationship between the director and the company. While having such an agreement is not a legal requirement, it creates certainty for the director and the company, allows both parties to be protected in situations of disputes or disagreements.

Employee Share Option Scheme (Agreements) 

An Employee Share Option Scheme is a scheme used by a company to motivate its employees. The scheme sets out rules relating to the grant of an option to eligible employees to subscribe for shares in the company. The share option gives the eligible employees the contractual right to acquire shares of the company in the future at a pre-determined price.

Types of Resolutions : Directors’ Resolutions & Members’ Resolutions

directors’ resolution is a way of documenting a significant decision made by a company’s board of directors, usually at a board meeting, on behalf of the company. Unless otherwise specified in the Companies Act 2016, any decision made in a board resolution is legally binding, as the board has complete oversight into important decisions of the company.

It is wise to note that if the shareholders believe that a wrong decision has been made, they can potentially bring a legal suit against the directors for a failure of discharging their duties and obligations which shall be in the best interest of the company.

Members’ resolutions (also known as Shareholders’ resolutions) are the decisions made by its shareholders at a shareholders’ meeting. Some shareholders’ resolutions require to be passed as an ordinary resolution (more than 50%) and some specifically require special resolution (at least 75%).

Under the Companies Act 2016, for a private company, its shareholders may pass a resolution either by way of a written resolution or at a meeting of the shareholders. However, in respect of a public company, a shareholders’ resolution can only be passed at a meeting of the shareholders.

Disclaimer: 

Whilst every care is taken to ensure the accuracy and integrity of the information provided, the information and content on this website are provided on an “as is” basis and to the fullest extent permitted by law is without warranty of any kind whatsoever, whether express or implied. In addition, the publication on this website is provided for information and general reference only. It does not constitute formal legal advice. The facts and circumstances of each case will differ and therefore will require specific legal advice. Please consult a professional lawyer for your specific situation.

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Published by ALLPROCONSULTANTS

We are a online management consultancy firm offering a range of services that includes incorporations, company secretarial services, accounting, book-keeping, taxation and payroll services. Our key management team are all qualified associate and fellow members of the MIA, MAICSA & CIMA. Our affordable and all inclusive pricing make us one of the leading boutique professional firms located in the heart of Subang Jaya with a small clientele. Visit us or contact us online to learn more about our services.

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