A Complete Guide to Drafting Share Subscription Agreements

A detailed guide on creating a Share Subscription Agreements using foundation, primary and secondary blocks.
A Comprehensive Guide on Drafting Share Subscription Agreements


What is a Share Subscription Agreement?

A Share Subscription Agreement provides the terms and conditions by which a person or entity subscribes (i.e., agrees to purchase) shares of a company.

Share Subscription Agreement vs Share Purchase Agreement

Both Share Subscription Agreements and Share Purchase Agreements (SPAs) are common instruments in corporate transactions in South Africa, but they serve distinct purposes.

Share Subscription Agreement involves the issuance of new shares by a company. On the other hand, Share Purchase Agreements involve the transfer of existing shares from one shareholder to another party.

Requirements and restrictions

As a point of departure, one should first look at the MOI of the Company which will be issuing the shares before commencing with the drafting of your Share Subscription Agreement. 

The shareholders’ agreement may also contain pre-emptive rights or other requirements or restrictions which that may impact the share issuance.

Next, you need to consider various provisions of the Companies Act.

Pre-emptive rights

Section 39 (2) of the Act provides for a statutory pre-emptive right.

Each shareholder of a Company has a right, before any other person who is not a shareholder of that Company, to be offered and, within a reasonable time to subscribe for, a percentage of the shares to be issued equal to the voting power of that shareholder’s general voting rights immediately before the offer was made.

Notwithstanding section 39 (2) of the Act, the Company’s MOI can limit, negate, restrict or place conditions upon the rights contemplated in section 39 (2) of the Act.

Furthermore, the above statutory pre-emptive right does not apply to:

  • public or state-owned companies (except if the MOI of these companies provides otherwise);
  • shares being issued in terms of options or conversion rights;
  • a situation where shares are issued and the consideration for the shares will not be received immediately (see section 40 (5) to (7) of the Act); or
  • the shares being issued are capitalisation shares as contemplated in section 47 of the Act.

Third-party approvals

Furthermore, the Company may also have entered into agreements restricting the Company from issuing further shares (for example, the consent of a financier may be required to increase the issued share capital of the Company).

Adequate consideration for shares

The shares must be issued for adequate considerations (which must be determined by the board) as contemplated in section 40 (1) (a) of Act.

If you advise the board of a company that proposes to issue further shares, ensure that you familiarise yourself with the meaning of “adequate consideration” as contemplated in the Act – A director of the Company may open themselves up to possible personal liability if such a director fails to vote against a decision to allot and issue shares, knowing such allotment and issuance will be contrary to the provisions of section 41 of the Act.

Shareholder approvals

Share issuance to directors and prescribed officers

Section 41 (2) of the Act determines that a special resolution of the shareholders of the Company is required if the shares are issued to a —

a. director, future director, prescribed officer, or future prescribed officer of the Company;

b. person related or interrelated to the Company, or to a director or prescribed officer of the Company; or

c. nominee of a person contemplated in paragraph (a) or (b).

A “person” “related or “interrelated” to the Company has a defined meaning in the Act. See section 1, the definition of “person” and section 2 of the Act.

Section 41 (2) of the Act provides for exceptions where shareholder approval for a share issuance, as contemplated in section 41 (1) of the Act, will not be required.

The exceptions (in other words, a situation where a special resolution will not be required) include a situation where the shares will be issued:

  1. under an agreement underwriting the shares, securities or rights;
  2. in the exercise of a preemptive right to be offered and to subscribe shares, as contemplated in section 39;
  3. in proportion to existing holdings, and on the same terms and conditions as have been offered to all the shareholders of the company or to all the shareholders of the class or classes of shares being issued;
  4. pursuant to an employee share scheme that satisfies the requirements of section 97; or
  5. pursuant to an offer to the public, as defined in section 95 (1) (h), read with section 96.

If the shares will be issued to a person contemplated in section 41 (1) of the Act and an exclusion contemplated in section 41 (2) of the Act does not apply, then it is advisable to include a condition precedent in the share subscription agreement specifically relating to the approval of the share subscription by the shareholders of the Company.

30% threshold

A further situation where the approval of the Company’s shareholders will be required is where the voting power of the class of shares that are issued or issuable as a result of the transaction or series of integrated transactions will be equal to or exceed 30% of the voting power of all the shares of that class held by shareholders immediately before the transaction or series of transactions.

Financial assistance

It may be that the Company wants to issue shares to a person, and the arrangement involves some kind of “financial assistance” as contemplated in section 44 (2) of the Act (note, financial assistance contemplated in section 44 (2) of the Act, does not include lending money in the ordinary course of business by a company whose primary business is the lending of money “excluded financial assistance”).

Provided that the arrangement does not relate to the lending money in the ordinary course of business by a company whose primary business is the lending of money and the arrangement is not pursuant to an employee share scheme, a special resolution of the shareholders of the Company will be required to approve the financial assistance relating to the share issuance.

The special resolution requirements contemplated in section 44 of the Act are often something that is missed, specifically in situations where “financial assistance” is not provided to a “director” or “prescribed officer”. The provisions in section 44 relate to “any person” and are not limited to “directors” or “prescribed officers”.

It must further also be remembered that financial assistance and share issuance also relate to a situation where a company provides financial assistance to a person who subscribes to shares in a related or inter-related company of the Company that is providing the financial assistance.

When authorising the “financial assistance” to enable a person to subscribe to the shares, the directors of the Company will need to apply the solvency and liquidity test, be satisfied that the terms of the financial assistance are fair and reasonable to the Company and that the “financial assistance” is not contrary to the Company’s MOI.

If the Board of the Company resolves to provide financial assistance for the subscription of the shares, and such financial assistance is not consistent with section 44 of the Act, then a director that failed to vote against the provision of such financial assistance may open him or herself up to possible damages claims for which he or she may be held personally liable as contemplated in section 77 (3) (e) (iv) of the Act.

Regulatory approval

The share subscription may also trigger a change in control as contemplated in the Competition Act. Firstly, you will need to establish whether there will be an acquisition or establishment of control over the whole or part of the business of the Company as contemplated in the Competition Act (see section 12 of the Competition Act).

If there is an acquisition or establishment of control as contemplated in the aforesaid paragraph, then you will need to have a look at the thresholds and categories of mergers to determine whether approval from the Competition Authorities is required.


The creation and transfer of the rights to the shareholder are specifically excluded from being a disposal by the Company for capital gains tax purposes (par 11(2)(b) of the Eighth Schedule).

Furthermore, a share issue is not a transfer of securities for Securities Transfer Tax (STT) purposes.

From the subscribing shareholder’s perspective, subscribing for shares in a Company establishes a cost (being the base cost of the asset) for the shares in the hands of the shareholder. This cost is relevant when the shareholder subsequently disposes of the shares. Furthermore, the Company’s contributed tax capital will be increased with the same amount. If a Company issues shares to a person by virtue of that person’s employment or holding of an office as director, the value of the shares could be subject to income tax (PAYE) in the hands of the employee or director and not capital gains tax (section 8C of the ITA).

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The subscribers can be individuals or entities who subscribe to the shares in the Company.


The Company is required to issue and allot the share being subscriber to.

Background / recitals

Preamble sections provide insight into the context and objectives of the Share Subscription Agreements. While they’re not a legal requirement and do not have direct legal implications, they can be helpful in clarifying the interpretation of the agreement’s operative provisions in the event of a dispute.

Share Subscription Agreements generally outline essential preamble elements relevant to any share subscriptions. Considering the unique nature and terms of the agreement, the parties may choose to incorporate more comprehensive details or opt to exclude some of the basic preamble elements.


Within an Share Subscription Agreement, certain conditions are specified that must be satisfied (or waived) before the transaction can proceed to closing. These conditions, termed “Conditions Precedent,” act as safeguarding mechanisms, ensuring that specific criteria are met before the transaction’s completion. If these conditions are not satisfied by a predetermined date, often referred to as the “long stop date”, neither party will be obliged to close the transaction. Let’s delve into some of the commonly included conditions:

Regulatory Approvals:

Depending on the nature and scale of the transaction and the jurisdictions involved, various regulatory approvals may be required.

  • Competition clearance: In transactions where the Company may have a significant market share and there is a change of control as result of the share issuance, competition or antitrust authorities might need to assess and approve the deal to ensure it doesn’t hinder market competition.

  • Sector-specific approvals: Certain industries, like banking, telecommunications, or energy, have specific regulatory bodies that must greenlight transactions to ensure compliance with sector-specific regulations.

Approvals from third parties:

Third-party approvals are necessary when external entities have a say in the transaction due to prior contractual arrangements or vested interests.

  • Consent from creditors: If the Company has outstanding debts or loans, creditors might have to consent to the issue of new shares in the company.

  • Contractual consents: Some business contracts may contain “change of control” provisions that require the other party’s consent if the controlling interest of the company changes hands.

Other commonly included conditions:

  • Shareholder approvals:  As discussed above, certain transaction may trigger provisions under the Companies Act, 2008, which will require certain processes to be followed and approvals to be obtained before the transaction becomes effective. To ensure the agreement does not become effective before these requirements are adhered to, the Parties will generally include conditions precedents addressing the approvals to be obtained.
  • Due diligence satisfaction: The Subscriber often conducts a due diligence exercise to assess the Company’s financial, legal, and operational aspects. A common condition is that the Subscriber must be satisfied with the due diligence findings.

The Long Stop Date:

This is the ultimate deadline by which all conditions precedent must be satisfied or waived, as may be applicable. If any condition is not met by this date, the transaction will typically not proceed, and neither party will have the obligation to close. The long stop date acts as a safeguard, ensuring that the transaction doesn’t remain in limbo indefinitely and that parties have clarity on the transaction’s timeline.



Next, the Share Subscription Agreement provides for certain fundamental aspects, such as the number of shares being subscribed to, the subscription price per share and the closing and effective date of the transaction.

This part also details the process which must be followed to close the transaction. For example, on the Closing Date, the Subscriber must pay the Subscription Price and the Company must issue and allot the shares and enter the name of the Subscriber in the securities register.

Lastly, this part determines when risk and benefit in and to the shares will pass (or be deemed to have passed) to the Subscriber.

Primary Blocks


In Share Subscription Agreements, Company warranties and representations serve as statements of fact or promises about the condition, operations, or prospects of the Company. They provide a basis for the Subscriber to understand the exact status of the Company and act as safeguards against potential undisclosed issues.

Warranties and representation are often heavily negotiated and scrutinised. From the Company’s perspective, warranties and representation must not be given lightly and qualified where possible:

  • Warranties might be qualified by what the Company “knows” or “reasonably ought to know”. For example, the statement, “To the best of the seller’s knowledge, there are no pending litigations against the target company.” This qualification limits the scope of the warranty to what the seller is actually aware of.
  • The effectiveness of warranties can be limited by specific disclosures made against them. A comprehensive Disclosure Schedule can detail exceptions to the general warranties, which can shield the Company from future claims related to disclosed items.
  • Some warranties might be qualified by materiality, implying that the representation only holds for issues above a certain significance or threshold.

Warranties can also be restricted in duration by using sandbagging clauses (which deal with issues the subscriber knew about pre-subscription but still makes a claim post-subscription), or through other specific conditions agreed upon by both parties.

If the Company is a holding entity with various subsidiaries, these sub-entities might have their own set of assets, liabilities, and operational intricacies. It’s then essential for these subsidiaries to provide warranties, especially if they form a significant part of the Company’s value proposition.

It’s important that the Share Subscription Agreement determines when the warranties and representations are made. Typically, they are given as of the signing date of the Share Subscription Agreement and may be repeated on the Closing Date.

Warranties and representations in Share Subscription Agreements play a vital role in bridging the information gap between the Company and the Subscriber. Given the potential risks and high stakes involved in investment transactions, it’s essential that these provisions are clearly stipulated, appropriately qualified, and diligently negotiated to protect the interests of both Parties.



The following parts must be configured for the indemnity block within the context of Share Subscription Agreements:

The Indemnified Event and Indemnified Claims

Indemnity claims arise on the happening of a specified event. For example, when there’s a breach of warranty provisions or undertakings provided by the Company in the Share Subscription Agreement. The Share Subscription Agreement needs to clearly provide for which type of events and claims the indemnity is provided for.

Type of Losses recoverable

Indemnities in Share Subscription Agreements usually cover direct losses and, depending on the negotiation, can also cover consequential losses. Be clear on exactly which types of losses and damages can be claimed in terms of the indemnity.


Often, there are de minimis thresholds below which claims won’t be entertained to avoid trivial disputes.

The indemnified party might be required to notify the indemnifying party within a specific timeframe or provide detailed documentation for a claim to be valid.

There could be a set duration post the completion of the transaction within which claims should be made.

Mitigation and reduction

The Company may require the Subscriber to mitigate their losses on the happening of an Indemnified Event. Make sure the Share Subscription Agreement addresses this issue.

Tax treatment

Depending on the jurisdiction, indemnity payments can have tax implications. It’s crucial to understand whether such payments are treated as compensatory (and potentially not taxable) or as additional subscription price (which might have capital gains implications).

Exclusive remedy

The indemnity can be set as the exclusive remedy available to the Subscriber on the happening of an Indemnified Event. In other words, if an Indemnified Event occurs, the Subscriber will not be able to institute action based on any other remedy.

Interplay between the indemnity and limitation of liability provisions

While indemnities provide a remedy for Indemnified Losses, the limitation of liability clause can cap the amount recoverable. It’s essential for Parties to be clear about how these clauses interact. For instance, if there’s a cap on the aggregate liability under the Share Subscription Agreement, it’s crucial to ascertain whether indemnity claims are counted towards this cap or are treated separately.

In conclusion, indemnities in Share Subscription Agreements play a pivotal role in safeguarding the interests of the Subscriber against identified risks or breaches by the Company. Given their significance, these provisions are often negotiated meticulously, and both Parties should be clear about their rights and obligations under such clauses.


Undertakings or covenants are promises made by parties in a Share Subscription Agreement to act (or refrain from acting) in a certain way.

Conduct of business (Interim Period Undertakings)

With these undertakings, the Company promise to operate the business “in the ordinary course,” ensuring that there aren’t any drastic changes that might affect its value or operations. For example, the Company may need to obtain the Subscriber’s consent before taking significant actions, like acquiring assets, taking on large debts, or making substantial operational changes. Also, the Company must ensure that relationships with suppliers, customers, and employees remain intact and that assets aren’t sold off or encumbered.

Limitation of liability

In the context of Share Subscription Agreements, limitation of liability is a fundamental element. It demarcates the extent to which a Company can be held accountable for claims stemming from or related to the Agreement. The following aspects need to be addressed in the limitation of liability provisions.

Types of Claims that will be limited

More often, the Company will endeavor to limit all types of claims directly or indirectly relating to the Agreement. From the Subscriber’s perspective, an attempt should be made to only limit claims associated with breach of contract excluding any breach which pertains to the Warranties, Indemnities or Undertakings.

Calculation of limitation

The computation of the limitation is also crucial. Most Share Purchase Agreements, the total liability is restricted to a designated percentage of the total Subscription Price. This furnishes a definite and quantifiable maximum liability for both Parties to contemplate.


The Company may contemplate making certain disclosures relating to the Warranties. In this case, claims regarding breach of a Warranty may be qualified. In other words, if a fact has been accurately disclosed in the Disclosure Schedule of the Share Subscription Agreement, it may limit a Claim under the Agreement despite a Warranty indicating the contrary.

Excluded Claims

Most Share Subscription Claims will unequivocally state that any limitation of liability does not apply in instances of fraud, willful misrepresentation, or dishonesty on the part of the Company. This ensures that deceitful actions are not shielded by contractual terms. A Subscriber may also argue that any indemnity claims must not be constrained by the limitation of liability provisions.

Other aspects

Share Subscription Agreements may incorporate a threshold below which claims cannot be brought, to avert trivial claims.

There might be stipulated time frames within which claims can be made post-completion.

Subscribers may be obligated to take reasonable steps to mitigate any loss before making a claim.

Clauses may be included to prevent a Subscriber from recovering the same loss under multiple provisions of the Share Subscription Agreement (e.g., under both warranty and indemnity clauses).

In summary, limitation of liability in Share Subscription Agreements affords a balance of protection for subscribers while providing a Company with a clear framework of their potential exposure.


Confidentiality provisions in Share Subscription Agreements are vital elements engineered to safeguard the sensitive information of the parties, primarily the Company, during and subsequent to the subscription process.

Given the nature of investment activities, a plethora of proprietary, financial, operational, and at times undisclosed information is exchanged, which can be adverse if disclosed. Here’s what needs to be addressed in the confidentiality provisions in your Share Subscription Agreement.


The cardinal aim of confidentiality provisions is to shield non-public, sensitive data from unauthorised dissemination or usage. It is important to precisely delineate the Purpose for which Confidential Information may be utilized. In an investment context, the Purpose is typically confined to appraising the transaction. Any alternative use of the Confidential Information will constitute a transgression of the confidentiality provisions.

Scope of Confidential Information

The Share Subscription Agreement should furnish a clear explication of what constitutes “confidential information.” This can span from financial data, business stratagems, customer rosters, intellectual property, to specific transaction terms. Not every piece of shared information is confidential. Common exclusions encompass information already in the public domain, previously known to the receiving party, or independently devised without reference to the confidential information.


Parties must agree not to divulge confidential information to unauthorized third parties. Obligations may also be added requiring Parties to adopt reasonable precautions to safeguard the confidential information, such as housing in secure locations or encrypted digital formats.


Parties generally restrict access to the confidential information to individuals on a “need-to-know” basis and may require that any other person who may require access to the confidential information may be required to agree to certain confidentiality undertakings before the confidential information is made to them.


 The duration, commonly spanning from 2-5 years post-finalization of the transaction, should be stipulated. However, certain types of information, like trade secrets, might be protected for an indefinite period.

Permitted Disclosures

There might be instances where the receiving party is obligated to disclose, like due to regulatory mandates, court orders, or legal obligations. The provision should determine such exemptions, usually with the stipulation that the disclosing party provides prior notice and takes measures to ensure confidential treatment of the information.

Return of confidential information

Upon conclusion of the transaction or if the deal capitulates, there’s usually an obligation to either return or obliterate all confidential materials. Some provisions might permit parties to retain copies for compliance or archival purposes.


The provision should outline repercussions for breaches, which can encompass immediate court orders to halt further breaches, compensation for any loss endured due to the breach, indemnity covering costs, including legal fees, resulting from the breach.

The aforementioned facets ensure a structured approach to managing confidentiality, which is indispensable in maintaining the integrity and trust between the parties in a Share Subscription Agreement.

Dispute resolution

While court litigation is one pathway to resolution, it can be protracted, costly, and potentially detrimental to reputations of the Parties. This has fostered the inclusion of alternative dispute resolution (ADR) clauses in Share Subscription Agreements. One specific method, particularly relevant to any calculation or valuations, is Expert Determination.

Expert Determination is a mechanism where disputing parties consent to appoint a neutral third-party expert to adjudicate specific issues. The process is typically swifter and less formal than court or arbitration proceedings.

Disputes over, for example how a breach of a Warranty impacts on the value of the Company often center around accounting principles, valuations, and adjustments. Given the specialized essence of these topics, an accounting or financial expert’s opinion can be more precise and efficient than a drawn-out legal struggle.

Why opt for Expert Determination?

  • Expert determination is generally faster than other modes of dispute resolution, with some determinations rendered within weeks or even days.
  • Evading court or arbitration can conserve substantial amounts in legal fees and associated expenditures.
  • The determiner boasts specialized knowledge, ensuring the decision is technically sound.
  • Proceedings and outcomes are generally maintained in confidentiality, safeguarding sensitive business data and reputations.


The parties might pre-select an expert or concur on one when a dispute emerges. If they can’t agree, they might resort to a professional body (e.g., an accountancy institution) within South Africa to appoint an expert.

Each party tenders their arguments and pertinent documents to the expert.

The expert scrutinizes the submissions and may pose questions or solicit further information. Once satisfied, they make their determination.

The Share Subscription Agreement should stipulate whether the expert’s determination is binding. If binding, it’s typically final, with limited grounds for appeal or challenge.

It’s imperative to clearly demarcate the scope of the expert’s mandate. They should solely be resolving the specific technical issue and not broader contractual disputes.

The chosen expert should be neutral and not have any prior engagements or conflicts of interest with either party.

Who bears the cost?

Generally the cost issue is left to the expert to determine and parties may be require to contribute equally to costs before the expert determination begins.


Incorporating expert determination clauses in Share Subscription Agreement, especially for technical accounting or financial disputes offers an efficient, cost-effective, and technically sound resolution mechanism. Parties should, however, clearly define its scope, process, and implications in their agreement to ensure clarity and fairness.

Secondary Blocks


View the detailed guide on boilerplate ↗

Boilerplate bocks, while often considered standard, play a vital role in shaping the overall legal framework of a contract. As such, it is imperative to give these provisions careful consideration and ensure they align with the parties’ intentions and objectives. Neglecting the importance of boilerplate block can lead to unforeseen consequences and potential litigation.

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