The Relationship between Investment Contracts and Shareholder Agreements

When dealing with venture companies and the like, there are instances where only an investment contract is concluded when a venture capitalist (VC) and others make an investment, and there are also cases where both an investment contract and a shareholders’ agreement are concluded. There are various types of contracts concluded when investing in venture companies and the like, but surprisingly few people have a thorough understanding of each type of contract or accurately understand the differences between each type of contract.
Therefore, in this article, we will explain what an investment contract and a shareholders’ agreement are, and then explain the relationship and differences between the two.

What is an Investment Agreement?

An investment agreement is a contract that primarily stipulates the conditions for executing an investment when an investor acquires shares. In simple terms, it is a contract that determines the conditions for investors, such as Venture Capitalists (VCs), when acquiring shares.

Parties to the Investment Agreement

In an investment agreement, the following three parties are typically involved:

1. The company issuing the shares
2. The founding shareholders
3. The investor

Common Names for Investment Agreements

Investment agreements can be referred to by various names, such as the following:

1. Investment Agreement
2. Share Subscription Agreement
3. Bond Subscription Agreement
4. Share Transfer Agreement

The name of the agreement is merely a label and does not change the content of the agreement.

Main Contents of the Investment Agreement

The content of an investment agreement typically includes the following:

• Provisions regarding basic matters related to the investment
• Provisions regarding the preconditions for the investment
• Provisions regarding the shares
• Provisions regarding company management
• Provisions regarding disclosure of information
• Provisions regarding the investor’s exit
• Provisions regarding general clauses

For more details about the investment agreement, please refer to the following article:

https://monolith.law/corporate/importance-and-necessity-of-investment-contract[ja]

What is a Shareholders’ Agreement?

A shareholders’ agreement is a contract that establishes the rights and obligations between the main investors, the issuing company, and the founding shareholders after the execution of an investment.

Contracting Parties in a Shareholders’ Agreement

In an investment contract, the following three parties are assumed to be the contracting parties:

1. The company issuing the shares
2. The founding shareholders
3. Major investors (such as VCs)

Main Contents of a Shareholders’ Agreement

The contents of a shareholders’ agreement mainly include the following:

• Contents related to company management
• Contents related to information disclosure
• Contents related to the exit of investors

Some may think that the main contents of a shareholders’ agreement overlap with the main contents of an investment contract. In fact, the contents mentioned as the main contents can indeed overlap in an investment contract and a shareholders’ agreement. Therefore, the relationship between the investment contract and the shareholders’ agreement will be explained below.

What Kind of Contracts are Concluded When Investing?

Before explaining the relationship between investment contracts and shareholder agreements, let’s first discuss the types of contracts that are concluded when investing.

When Only an Investment Contract is Concluded

Firstly, there may be cases where only an investment contract is concluded. In this case, since the only contract concluded is the investment contract, it is necessary to include all the necessary contents in the investment contract. Therefore, although it depends on the case, it will include most of the main contents of the investment contract mentioned above.

When Both an Investment Contract and a Shareholder Agreement are Concluded

Next, there may be cases where both an investment contract and a shareholder agreement are concluded. In this case, the contents related to company management, information disclosure, and investor’s Exit, which were introduced above, are generally stipulated as the contents of the shareholder agreement.

Reasons Why Multiple Patterns of Contracts Concluded When Investing are Assumed

Although we have introduced the cases where only an investment contract is concluded and where both an investment contract and a shareholder agreement are concluded, we will explain the reasons why multiple patterns are assumed. First, considering the pattern where only an investment contract is concluded, the contracting parties of the investment contract were, as mentioned earlier, the stock issuing company, the founding shareholders, and the investors. The investment contract is a “contract”, so it only binds the contracting parties, the stock issuing company, the founding shareholders, and the investors. Therefore, even if the three parties, the stock issuing company, the founding shareholders, and the investors, agree to appoint the investor as a director, if the shareholding ratio of the founding shareholders and investors does not reach a majority, the founding shareholders and investors alone cannot appoint the investor as a director.

As such, with only an investment contract, it is not possible to bind other shareholders by the effect of the contract, and it is not possible to deal with cases where it is inconvenient unless other shareholders are made contracting parties and the binding force of the contract is applied.

Therefore, the contract concluded is a shareholder agreement. The parties to the shareholder agreement are, as explained above, the stock issuing company, the founding shareholders, and the main investors (VCs, etc.). In the shareholder agreement, since the main investors (VCs, etc.) are included as the contracting parties, it is possible to apply the binding force of the contract to other shareholders, and by the binding force of the contract, it is possible to reach a majority shareholding ratio. For these reasons, an investment contract is concluded when there is no need to bind other shareholders as contracting parties, and a shareholder agreement is concluded when there is a need to bind other shareholders as contracting parties.

However, for example, if there are only a few investors and there is no problem even if other shareholders are not bound as contracting parties, a shareholder agreement is not concluded, and only an investment contract is concluded. This is because the purpose can be achieved by concluding only an investment contract, and the risk of becoming a dispute later is low. Furthermore, it is also possible to simplify the procedure.

As mentioned above, multiple patterns of contracts concluded when investing are assumed due to the relationship with the size of the company, the relationship with the shareholding ratio, the convenience of the procedure, etc.

Asset Distribution Agreement

When investors such as venture capitalists (VCs) make an investment, an asset distribution agreement may be concluded. An asset distribution agreement is a contract that stipulates matters related to exits through M&A that involve changes in management control.

Contracting Parties in an Asset Distribution Agreement

In an asset distribution agreement, the following three parties are assumed to be the contracting parties:

1. The company issuing the shares
2. The founding shareholders
3. All shareholders

Common Names for Asset Distribution Agreements

Asset distribution agreements can be referred to by various names, such as the following:

1. Asset Distribution Agreement
2. Agreement on Shareholder Distribution Related to Acquisition
3. Agreement Among Shareholders

Main Contents of an Asset Distribution Agreement

The contents of an asset distribution agreement mainly include the following:

• Contents related to the right to request simultaneous sale
• Contents related to deemed liquidation

As the name suggests, an asset distribution agreement is a contract concerning the distribution of assets, and it is necessary to bind those involved in the asset distribution as contracting parties. Therefore, a significant feature is that all shareholders, including angels and employee shareholders, become contracting parties.

https://monolith.law/corporate/investment-contract-liquidation-provision[ja]

Summary

We have explained the relationship between investment contracts and shareholder agreements. It is essential to understand what each of these contracts stipulates and the relationship between them. Determining which parties should be bound by the contract is crucial for both the company and investors such as venture capitalists (VCs), so it is also important to clearly identify who the parties are when entering into a contract. As specialized legal knowledge is indispensable for investment contracts and shareholder agreements, it is advisable to seek advice from a lawyer when drafting or concluding these contracts.