Research & Analysis

Negotiating an Equity Capital Infusion from Outside Investors

The purpose of this guide is to familiarize microfinance institutions (MFIs) with some of the issues that are commonly addressed in the negotiation of an equity capital infusion from outside investors. To facilitate this understanding, this guide includes a sample annotated equity offering Term Sheet (the document that is often used by an MFI in the early stages of an equity infusion negotiation) as well as a Shareholders Agreement and an annotated Share Subscription Agreement (two relatively customary documents that are executed by an MFI with outside investors to provide for the terms and conditions of a proposed investment and to govern the relationship among the MFI and the investors once an investment is made).

The annotated sample Term Sheet, Shareholders Agreement, and Subscription Agreement, collectively referred to as Definitive Agreements, are intended to introduce an MFI to provisions commonly encountered in the documents governing the issuance of equity interests, along with explanations of why these provisions are sought by an MFI and/or investors in an MFI and the potential impact of the provisions on the MFIs and/or investors. The Definitive Agreements do not purport to be exhaustive of all provisions typically found in documents used in the issuance of equity interests by an MFI. Because the purpose of the Definitive Agreements is to explain a variety of common provisions found in such agreements, the Definitive Agreements include provisions that do not favor the MFI. As a result, an MFI may try to resist inclusion of many of these terms in the process of negotiating its Definitive Agreements. In certain cases, alternative drafting suggestions that might be more favorable or at least neutral to the MFI are suggested.

An MFI that is issuing shares may find that its potential investors will propose using their own forms of agreements as the basis for negotiations, and such forms may differ significantly from the Definitive Agreements. An understanding of the basic provisions found in these Definitive Agreements, however, should provide an MFI with a better basis to negotiate the terms of other forms of agreements that an investor may propose. Furthermore, the Definitive Agreements have been based on general practices and legal principles and are not based on the law of any particular jurisdiction, and they have been drafted as a learning tool with a general global audience in mind. An MFI will no doubt find that the law and custom of each jurisdiction vary greatly in the manner in which an institution can issue equity securities, the type of securities that can be issued, and the provisions that govern the relationship between the MFI and its investors. Accordingly, any MFI considering an equity offering should consult with local legal and financial advisers on the specific terms and conditions of a proposed issuance of equity securities based on its particular business needs, local custom, and legal requirements.