Share subscription agreement vs share purchase agreement: shares, warranties, stamp duty

A share subscription agreement and a share purchase agreement sound similar and could not be more different. One is used to issue brand new shares to an investor; the other is used to buy existing shares, usually the whole company, from a seller. Using the wrong document has real consequences, including on stamp duty. Here are the three main differences, and how HMRC treats each one.

New shares vs existing shares

The first and most fundamental difference is what is being bought.

A share subscription agreement allows the subscriber to subscribe for, in other words buy into, new shares that are issued or created by the company. Companies typically use it to get their investors to sign up and agree to invest money in return for shares. At the end of the process the investor holds a percentage, a few shares, in return for the money they gave to the company.

A share purchase agreement is typically made privately between individuals or entities for the purchase of shares that already exist and are already owned by someone else. The goal is usually to buy the entire company, and the way that is done is by buying all of its shares from the existing shareholders. At the end of the process the buyer owns the whole company.

So in a subscription the money goes into the company and the investor becomes one shareholder among others. In a share purchase the money goes to the sellers and the buyer takes over. The cash flows in opposite directions and the outcomes are completely different, which is why the documents are too.

How long is a subscription agreement vs an SPA?

The second difference is length, and it tells you a lot about what each document is for.

A subscription agreement is typically no more than 15 pages. It is a short document.

A share purchase agreement is a different animal. It is not uncommon to find SPAs that are at least 100 pages long. The length is driven by the contents, which brings us to the third difference.

Warranties and contents of each agreement

In a subscription agreement, it is typically the company telling the investor what kind of shares it is giving them, together with information about the investment round. The focus is on the terms of the investment: how many shares, what class, what price, when.

In a share purchase agreement, a large section of the document is taken up by warranties given by the seller or sellers to the buyer. Warranties are promises the sellers make about the state of the business the buyer is acquiring. Because the buyer is taking on the entire company, with all its contracts, employees, liabilities and history, it wants the sellers to stand behind a long list of statements about every part of it. That is where most of the 100 pages come from. For more on what goes into an SPA, see the share purchase agreement explained and what is a warranty in a business sale?.

An investor subscribing for new shares does not need that level of protection in the same way, because they are not taking over the business. They are buying a stake and are usually more interested in the terms of the round and the rights attached to their shares.

Stamp duty: subscription vs share purchase

The two documents reflect two different relationships, and HMRC recognises them as different.

Under a share purchase agreement, stamp duty is typically payable if the purchase price is above £1,000. That is because there is a buyer and a seller of shares, and stamp duty is charged on that purchase of shares. The stamp duty is payable by the buyer. Separately, there may be capital gains tax for the seller on the sale of those shares.

Under a subscription agreement, where the company is issuing new shares to an investor or shareholder, there is typically no stamp duty payable and no capital gains tax either. Nobody is selling anything; the company is creating new shares.

In my experience this is the point that catches people out. A founder who sells some of their own shares to an investor under an SPA, rather than having the company issue new ones under a subscription agreement, can trigger stamp duty for the investor and capital gains tax for themselves, when a subscription would have done neither. Choosing the right document is not just a drafting point.

Which agreement do you need?

As a rule of thumb:

• Raising money for the company from an investor: share subscription agreement. New shares, money into the company.
• Buying a business by acquiring its shares from the owners: share purchase agreement. Existing shares, money to the sellers, extensive warranties.

If your deal involves both, for example an investor who buys some existing shares from a founder and subscribes for new ones at the same time, you will need both documents, and the tax treatment of each part will differ.

Next steps

Before you sign anything, be clear about whether shares are being created or transferred, because that single fact determines the document, its length, the warranties and the stamp duty position. If you are investing in or raising for a company, see what is a share subscription agreement?. If you are buying a business, have a corporate solicitor draft or review the share purchase agreement before you commit.