Documentation Required for Capital Finance

Capital Finance - Documentation Involved


Capital finance involves the investor taking a stake in your company rather than receiving interest and repayment of a loan. Its' distinguishing feature is that it will involve your company issuing shares to the investor. Therefore, more complex documentation is required in order to make the necessary rearrangements to your company's share structure. The legal requirements in relation to the issue of shares are addressed in Issuing and Dealing in Shares and Debentures.

Documentation Involved

Capital finance involves the issue of new shares to an investor. The investment documentation is likely to include a subscription or shareholder agreement between the investor, your company , its directors and its existing shareholders setting out the framework of the investment and requiring changes to the Articles of Association relating to the new shares.

Directors may well be expected, under the terms of the investment documentation, to give warranties to the capital investor as to the state of their business at the time of the investment. If it turns out that the warranties were incorrect, those giving the warranties may be personally liable to the investor even if they received no direct cash benefit. However, directors are not normally required to offer guarantees to the investor. If the business fails and the investor loses his money (without breaches of warranty) it is rare that a director or proprietor would be asked to guarantee the recovery by the investor of his capital investment.

Directors and officers liability insurance is available but such policies are usually of limited value in relation to such warranties.

Directors will normally also be asked to enter in to a formal service agreement laying down each directors duties, obligations, rights and benefits arising from their office and employment. They may also be expected to enter into personal restrictive covenants, so that if they leave the company, they cannot compete with the company's business. They may be required to sell any shares they have, often at a nominal price, on their departure from the company.

The investors' solicitors draft the documentation and you must pay their costs. Extensive negotiation is normally necessary (and costly) but where the amounts involved are relatively small there is often a financial disincentive to negotiate other than on the most vital points.

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