Mastering the market – key transaction documents for investing in the UK

The investment process can be both thrilling and daunting for those looking to take their business to the next level. Let’s explore the main transaction documents needed for a UK company raising investment. 

Term sheet 

Once an investor has completed their due diligence and made a soft commitment to invest, the company and investor will look to agree a term sheet (otherwise known as “heads of terms”) which sets out the key terms of the investment and any additional rights and requirements that the investor expects. 

Although term sheets are generally non-binding, except for certain clauses such as confidentiality, they evidence the intentions of the respective parties to each other and are used as a framework to prepare the more complex, binding investment documents. It is important therefore to negotiate the term sheet, and to agree on important commercial and legal issues at this stage. 

Shareholders’ or investment agreement 

The agreed term sheet will be used to prepare a shareholders’ agreement (SHA) or an investment agreement (IA), which are contracts made between the company and its shareholders/investors. These usually set out how the company is to be governed and managed, and regulate the relationship between the company and its shareholders/investors. 

Whilst the agreements may contain similar provisions, an IA will usually set out the terms and conditions of an investment and contain more protections and reassurances for investors, who tend to be more detached from the overall running of the business. 

Where there is an existing SHA or IA and no new terms are being negotiated or granted to an investor, the investor may be asked to sign up to the existing document by entering into a deed of adherence. 

Articles of association 

Articles of association are the main constitutional document of a company and they set out the rules on how the company is operated. The articles will need to work in tandem with the SHA or IA, and may need to be updated with an investment round depending on the terms agreed. 

The articles are publicly available and tend to set out general rights or restrictions applying to all officers (e.g. directors) and shareholders of the company. They are often complemented by a SHA or IA which supplements the articles and sets out more “private” rights. 

Other documents 

Where an investment is made for shares to be issued at a later date, this may be governed by other documents. Two of the most common agreements for this are an advanced subscription agreement (ASA) and a convertible loan note (CLN). 

An ASA is where an investor advances funds for shares to be issued at a later date, often at a discounted price at the next funding round or at a set price after a longstop date. 

A CLN is essentially a loan with the option to convert the principal and any interest into shares at a specific price and upon certain trigger events.

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Mei is an associate in the Corporate, Commercial and Finance team and joined Kingsley Napley in August 2021 from a regional firm. She advises entrepreneurs, investors and established businesses across a variety of sectors on a broad range of corporate and commercial matters.