It is standard practice that when increasing the capital of a company the shares are subscribed for by the investor only by paying in the contribution. However, a recent decision of the Supreme Court has once again supported the approach that when increasing the capital of a company—especially where new investors are involved—it serves the interests of all parties to enter into a formal subscription agreement.
A formal subscription agreement is necessary and justified as according to the approach taken by the Supreme Court, a contribution made by an investor (e.g. by way of bank transfer on the basis of a shareholders’ resolution) does not automatically create a subscription agreement between the company and the investor under which the company would become liable to issue a shareholding to the investor. In the absence of a formal subscription agreement, e.g. a bank transfer by the investor to the company will be void of contractual basis until the agreement is deemed to have been entered into under the law. The Supreme Court argues that an agreement is deemed to have been entered into under the law only as of the moment the company expresses its consent to the subscription. Where no subscription agreement exists, however, the company might not necessarily express its consent until it takes concrete steps to register the capital increase (e.g. by way of filing applications with the Commercial Register and the Central Securities Depository).
Thus, in the absence of a formal subscription agreement the investor, having made a monetary contribution to increase the capital, does not in essence have a claim to increase of the capital and transfer of a share. Where the company fails to complete the capital increase within the deadline set out in the resolution (or, where no such deadline is set, within six months as of the date of the resolution), the investor will merely have a non-contractual claim to recover the contribution under the unjust enrichment clause.
It is clear from the above that absence of a formal subscription agreement may place the investor at a disadvantage, not least of which is that the management board of an investor that contributed without a subscription agreement may become liable for disregard of due care. Nevertheless, one must take into account that a subscription agreement per se does not necessarily protect the interests of the investor to the desired degree. Insofar as a subscription agreement essentially creates a legal relationship solely between the company and the investor, the latter will be able to claim only against the company whereas such claims should be settled, inter alia, at the expense of the investor’s own contribution to the detriment of their investment. Therefore, as far as the investor is concerned, it would be desirable to include the shareholders of the company as a party to the subscription agreement and rely on their representations and warranties as a reasonable basis for the investor’s decision to invest in the company.
Besides serving to protect the interests of the investor, a subscription agreement also naturally purports to protect the interests of the company and its shareholders. For instance, unless a formal subscription agreement exists, disputes may arise post-increase as regards the presumptions which the investor relied upon when joining the company. An investor’s claim for damages cannot be ruled out where the investor succeeds in proving that it made a contribution in reliance upon representations made by the company and showing the company in a favourable light but which later proved to be untrue. Therefore, in order to avoid this scenario, the subscription agreement should expressly define the assumptions upon which the investor based its decision to contribute. In making representations and warranties to the investor, the management board of the company may be held liable for them and thus it is recommended that at least the representations and warranties made in the subscription agreement be audited to assure that they are valid.
This entry was posted in Banking and Finance, Corporate and Commercial. Bookmark the
permalink. Both comments and trackbacks are currently closed.
Management of legal risks posed by inclusion of new investors in a company
It is standard practice that when increasing the capital of a company the shares are subscribed for by the investor only by paying in the contribution. However, a recent decision of the Supreme Court has once again supported the approach that when increasing the capital of a company—especially where new investors are involved—it serves the interests of all parties to enter into a formal subscription agreement.
A formal subscription agreement is necessary and justified as according to the approach taken by the Supreme Court, a contribution made by an investor (e.g. by way of bank transfer on the basis of a shareholders’ resolution) does not automatically create a subscription agreement between the company and the investor under which the company would become liable to issue a shareholding to the investor. In the absence of a formal subscription agreement, e.g. a bank transfer by the investor to the company will be void of contractual basis until the agreement is deemed to have been entered into under the law. The Supreme Court argues that an agreement is deemed to have been entered into under the law only as of the moment the company expresses its consent to the subscription. Where no subscription agreement exists, however, the company might not necessarily express its consent until it takes concrete steps to register the capital increase (e.g. by way of filing applications with the Commercial Register and the Central Securities Depository).
Thus, in the absence of a formal subscription agreement the investor, having made a monetary contribution to increase the capital, does not in essence have a claim to increase of the capital and transfer of a share. Where the company fails to complete the capital increase within the deadline set out in the resolution (or, where no such deadline is set, within six months as of the date of the resolution), the investor will merely have a non-contractual claim to recover the contribution under the unjust enrichment clause.
It is clear from the above that absence of a formal subscription agreement may place the investor at a disadvantage, not least of which is that the management board of an investor that contributed without a subscription agreement may become liable for disregard of due care. Nevertheless, one must take into account that a subscription agreement per se does not necessarily protect the interests of the investor to the desired degree. Insofar as a subscription agreement essentially creates a legal relationship solely between the company and the investor, the latter will be able to claim only against the company whereas such claims should be settled, inter alia, at the expense of the investor’s own contribution to the detriment of their investment. Therefore, as far as the investor is concerned, it would be desirable to include the shareholders of the company as a party to the subscription agreement and rely on their representations and warranties as a reasonable basis for the investor’s decision to invest in the company.
Besides serving to protect the interests of the investor, a subscription agreement also naturally purports to protect the interests of the company and its shareholders. For instance, unless a formal subscription agreement exists, disputes may arise post-increase as regards the presumptions which the investor relied upon when joining the company. An investor’s claim for damages cannot be ruled out where the investor succeeds in proving that it made a contribution in reliance upon representations made by the company and showing the company in a favourable light but which later proved to be untrue. Therefore, in order to avoid this scenario, the subscription agreement should expressly define the assumptions upon which the investor based its decision to contribute. In making representations and warranties to the investor, the management board of the company may be held liable for them and thus it is recommended that at least the representations and warranties made in the subscription agreement be audited to assure that they are valid.