Subscription Agreements for Investment



A subscription agreement sets out the terms of an equity investment into the company. It will set out the commercial terms of the investment such as the subscription price for shares, and the class and number of shares to be purchased. It will bind the parties to the deal.

The two main sections of a subscription agreement are 1- the mechanics of purchasing shares in the company and 2- the representations and warranties made to the investor.

Typically we recommend for the subscription agreement to be separate from the shareholder agreement. The reason for this is that, in the future if there are additional shareholders that sign up to the shareholder agreement, you do not have to show the terms of the original subscription agreement to these new shareholders.

Since the mechanics of a subscription agreement are relatively straightforward, I will discuss the representations and warranties section made to the investor.

Representations and Warranties

An investor will ask for the company (and sometimes also the founders) to give representations and warranties.

A representation is a statement as to a fact that what you are representing is true on a specified date. The representation is given to induce the investor to enter into the subscription agreement.

A warranty is a promise that a statement as to a fact is true as at a specified date.

The key difference is the remedy available for each. If there is a breach of representation, the innocent party can bring legal proceedings for misrepresentation and seek to rescind the contract. This means that the contract could be set aside, and the company would be required to return the parties to the position before the contract was entered into. If there is a breach of warranty, the innocent party will only be entitled to damages.

Although there is a difference between the two, it will often be seen that the company is giving both representations and warranties as to a list of the same statements of facts.

Examples of representations and warranties given are:

  1. constitution and shares of the company;
  2. director and employees;
  3. IP;
  4. accounts and tax; and
  5. litigation

Top tips for Founders when giving representations and warranties

1. The company gives representations and warranties only – not Founders. If the Founders also give representations and warranties, then if there is a breach the Founders would be personally liable.

2. Include limitations on liabilities in respect of the representations and warranties such as capping the liability amount and limiting the period of time a claim may be brought.

3. If you see that a representation or warranty may not be true because of a specific reason, you can disclose these specific circumstances in a disclosure letter. If it is disclosed in a disclosure letter, the investor cannot claim a breach of representation or warranty for that specific reason later on.

4. Carefully review to ensure the representations and warranties are only in respect of matters of fact (current or historic) known by the company. You do not want to make statements that the company cannot confirm is 100% true, or any statements or forecasts about the future.

5. Be careful of very general representations and warranties such as “compliance with all laws”. There are many laws that a company must obey and it is difficult to ensure compliance with every single one.

6. A company will want to give as few representations and warranties as possible as the company will be limiting its exposure for potentially being sued in the future for a breach of a representation or warranty.

Tara Chan

If you would like to discuss any of the matters raised in this article, please contact:

Pádraig Walsh
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.