Brief Introduction to Shares Purchase Agreement (SPA)

Functions of SPA

SPA’s key word is “risk”.  VC/PE investment is “high risk, high return”.  In addition to documenting the agreed investment transaction, SPA is also an important risk management tool for the discovery, reduction and allocation of risk (including known  and unknown risk, reducible and irreducible risk).  For example, first, SPA’s representations disclose known risks and allocate unknown risks.  Second, the covenants section of the SPA provides for the reduction of known risks that can be effectively reduced.  Finally, the specific indemnity section of the SPA allocates known risks that cannot be reduced.

Structure of SPA

Components of SPA

The main components of a SPA include:

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Brief Introduction to Shareholders’ Agreement (SHA)

Functions of SHA

SHA’s key word is “control”.  After a VC/PE investment is made, investors will typically become minority shareholders of the portfolio company and do not have control over the operation and management of the portfolio company. The default rules of company laws are that a simple majority of shareholders elect a board of directors, and the board of directors hire the management. A simple majority of the directors will make most of the company’s major decisions, which will be executed by management. A small number of very major matters also require the approval of a simple majority of the shareholders. A very small number of fundamental matters also require the approval of a super-majority of the shareholders (typically 2/3). It is obvious that as minority shareholders who do not control operation, investors will have very limited protection under company laws.  Therefore, it is necessary for the investors to obtain additional contractual protection to impose a certain degree of influence on the company’s decision-making process,  its shareholder structure and exit of their investment. It should be note that the contractual “control” of the investors is generally not the power to pushing through a decision, but rather the right to participate in the decision making process and, in some case, to veto.

Structure of SHA

The main components of SHA include:

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Brief Introduction to Memorandum and Articles of Association (MAA)

Functions of MAA

MAA’s keyword is “preference”.    In VC/PE investment, investors typically receive a certain series of preferred shares issued by the company.  As the term “preferred shares” suggests, preferred shares enjoy preference over the ordinary shares.  In the company’s capital structure, preferred shares rank in between ordinary shares and debt. 

MAA created the preferred shares and give it priority in economic rights (mainly the liquidation preference and dividend preference).  MAA also provides for the conversion mechanism of preferred shares.  Conversion is an important concept and the anti-dilution adjustment as well as voting power of the preferred shares are based on it.  In many deals, preferred shares also have debt-like redemption feature, allowing their holders to request the company to redeem those preferred shares after certain number of years.

It is worthwhile to point out that preference is a relative concept.  Preference can change the order of asset distribution, but it cannot change the sum of distributable asset.  For example, if the company does not have sufficient asset to pay off its debt, then preferred shares’ preference over ordinary shares will no longer be meaningful.

Structure of MAA

The Open Source Form MAA sets forth the rights of preferred shares in a Schedule of Preferred Shares.   The main components of this Schedule of Preferred Shares include:

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Brief Introduction to Investment Terms (TS)

Functions of TS

TS summarizes the main terms of the investment deal  as agreed between the company and the investors, including valuation, investment amount and investor rights.  TS also provides a roadmap for drafting investment documents.  Because the investment terms described in the TS have not yet been reflected in the definitive investment documents, they are not legally binding.   Although the TS is not legally binding and the definitive investment agreement may deviate from the terms in the TS based on due diligence findings and other factors, the parties should still treat TS very seriously, because seeking to unilaterally change the terms in the TS without good reasons will be viewed negatively and result in reputational damage.

Because it will take some time to negotiate definitive investment documents and close the investment, the parties will agree on a legally binding exclusivity provision, giving investors exclusive right to negotiate for a reasonable period of time.   

Structure of TS

Open Source Form TS is divided into 4 parts:

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How to write efficient forms


Our objective is to provide a set of investment document forms that are efficient, specifically:

  • Easy to use : Their users can efficiently use them for various common scenarios of investment deal.
  • Easy to understand : Their readers can easily understand the transaction structure and investment terms described there.
  • Easy to Negotiate: Both parties to the deals can negotiate the content of these documents efficiently.
  • Easy to Revise: These documents can be efficiently revised to reflect the changes negotiated by the parties.


In order to achieve the objectives of “easy to use, understand, negotiate, and revise” that we set out, we follow the following principles when drafting these forms:

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