Why are equity investments always controversial? The key lies in the poorly drafted contract! A professional business lawyer will tell you how to draft a complete equity investment agreement.

I. The root cause of frequent equity investment disputes: Have you stepped on these "hidden landmines"?

In Taiwan's investment market, equity investment disputes are often not sudden "accidents," but rather "time bombs" planted due to insufficient prior planning. In-depth analysis of numerous cases reveals that the root cause of the vast majority of disputes points to the same core issue—Lack of clear and comprehensive investment and shareholder agreementsThe following common pitfalls are the common causes of almost all investment disputes:

(i) "Verbal agreement" replaces "written contract", rights and obligations become meaningless.

Many investors and entrepreneurs, due to personal relationships or the desire to "quickly advance the project," confirm investment conditions based solely on verbal promises, failing to include crucial matters such as "priority repurchase of shares after future profitability" and "major decisions requiring the consent of all shareholders" in the contract. Once the company's business direction changes or disagreements arise regarding profit distribution, verbal agreements lack legal basis and are difficult to uphold, directly leading to disputes where each party tells their own story. For example, the founder of a technology company verbally agreed with early investors that "investors could participate in daily operations and management," but this was not explicitly stated in the contract. Subsequently, the founder refused the investor's involvement, claiming "the investor lacks management qualifications," ultimately leading to a court case.

(ii) Vague contract terms create a "gray area" that becomes a breeding ground for disputes.

Some investment contracts simply stipulate the "investment amount" and "shareholding ratio," but avoid discussing core rights and obligations: for example, how are shareholders' voting rights allocated? What is the order and proportion of profit distribution? How are other shareholders' preemptive rights exercised when a shareholder transfers shares? These ambiguities may not be a problem when the company is stable, but they immediately become the focus of disputes when facing critical junctures such as financing, mergers and acquisitions, or losses. For example, the investment contract of a restaurant chain did not stipulate the "loss-sharing ratio." When a branch incurred huge losses, the founding shareholders and institutional investors had a serious disagreement on "whether to share the losses according to the shareholding ratio," leading to the company's shutdown.

(iii) Ignoring the "special circumstances" agreement, leaving no rules to follow in case of emergencies.

Business operations are fraught with uncertainty, but most investment contracts focus only on "routine operations," neglecting provisions for special circumstances: For example, should a founder's departure necessitate a mandatory transfer of shares? What are the conditions and costs for an investor's early exit? How is the order of debt and equity repayment determined when the company faces liquidation? These "low-probability events," once they occur, can easily trigger intense disputes due to the lack of contractual support. For instance, a core technical shareholder of a biotechnology company suddenly resigned, claiming "no impact on shareholding rights," while the investment contract failed to stipulate a "share handling mechanism for the departure of core personnel," leading to both technological and equity structure turmoil within the company.

(iv) Violation of the "mandatory provisions of the Company Law" renders the validity of the contract meaningless.

In pursuit of "profit maximization," some investors and companies include clauses in contracts that violate Taiwan's Company Act, such as "depriving minority shareholders of their right to inspect accounts" or "agreeing that shareholders are not obligated to distribute profits." Such clauses are invalid because they violate mandatory legal provisions. In the event of a dispute, not only can the matter not be resolved according to the contract, but the investor may also incur additional liability for "maliciously circumventing the law." For example, a manufacturing company's shareholder agreement stipulated that "minority shareholders may not question board resolutions," which was ruled by the court to violate the Company Act's provisions regarding shareholder oversight rights. Ultimately, the relevant clauses in the contract were invalid, leading to shareholder litigation.

II. Prevention is better than cure: The "moat" effect of equity investment agreements and shareholder contracts

Faced with the above risks, the most effective solution is not to rush into a response after a dispute occurs, but rather...From the outset, a "defense line" is built through comprehensive investment contracts and shareholder agreements.These two documents, seemingly just "paper agreements," are in fact the "constitution" of equity investment, with their core value embodied in three aspects:

(i) Clarify rights and obligations to eliminate "cognitive differences".

The contract formalizes the true intentions of both investors in writing, making "what can be done, what cannot be done, and what returns will be given for what extent" enforceable standards. For example, stipulating that "investors have voting rights in proportion to their investment, but major matters (such as capital increases or mergers and acquisitions) require the consent of shareholders holding more than two-thirds of the shares" can avoid disputes later on regarding "the ownership of decision-making power".

(ii) Pre-planning resolution paths to reduce dispute costs

A well-designed contract will pre-define the "dispute resolution method," such as "first resolve through negotiation, and if negotiation fails, submit to arbitration by the Taiwan Arbitration Center." Compared to direct litigation, this not only saves time and money but also avoids the impact of public commercial disputes on the company's reputation.

(iii) To constrain the behavior of both parties and ensure investment stability

The "breach of contract clauses" (such as penalty interest for late investment and compensation for losses for unauthorized transfer of shares) can bind both parties and reduce arbitrary breaches of contract. At the same time, the design of "exit mechanism" and "incentive clauses" can balance the long-term interests of investors and enterprises and reduce the risk of the partnership breaking down.

3. What core matters should be stipulated in a "complete" contract?

The content of investment agreements and shareholder agreements needs to be flexibly adjusted according to the type of enterprise, the amount of investment, and the cooperation model, but the following core matters must not be omitted, otherwise it will be a "landmine":

(a) Basic elements of investment: clearly explain the relationship between "money and stocks"

1. Investment detailsThe investor's investment amount, investment method (cash, in kind, technology, etc.), and investment period must be specified. If the investment is made in installments, the proportion of each installment and the liability for overdue investment (such as loss of equity or payment of liquidated damages) must be agreed upon.
2. Equity StructureThe shareholding ratio and equity nature (common stock, preferred stock, etc.) of each party after the investment; if an "option pool" (shares reserved for employees) is involved, the source and management method must be clearly defined.
3. Capital verification and registrationThe agreement should specify the timeframe for handling the equity transfer registration, the responsible party, and remedial measures for failure to complete the registration on time (such as termination of the contract or compensation for losses).

(II) Shareholders' Rights and Obligations: Avoiding Unclear Rights and Responsibilities

1. right to voteClearly define the method of exercising voting rights (based on shareholding ratio, one person one vote, or agreed ratio); list the voting thresholds for "major matters" (such as amendments to the articles of association, external guarantees, major asset disposals, etc.) (such as more than half or more than two-thirds approval).
2. Profit DistributionThe conditions for profit distribution (such as after-tax profit reaching a certain standard), the timing (such as annually, quarterly, or annually), and the proportion (based on shareholding ratio or agreed priority, such as preferred shares receiving dividends first); if there are accumulated losses, the method of compensation must be agreed upon.
3. Right to know and right to superviseThe frequency and manner in which shareholders review financial statements and meeting minutes; whether they have the right to nominate directors, supervisors, or appoint representatives to participate in management.
4. Obligations and constraintsShareholders are prohibited from engaging in "non-competition" activities (such as investing in competitors' companies); from disclosing company trade secrets; and from fulfilling their capital contribution obligations as agreed.

(III) Handling Special Situations: Preparing for "Unexpected" Events

1. Share transfer and exitWhen a shareholder transfers shares, other shareholders have the right of first refusal (price calculation method, exercise period); investors have the "mandatory repurchase request right" (if the company fails to meet the agreed performance or the founder violates the fiduciary duty, the investor can request the company or founder to repurchase the shares); shareholders have the "drag-along right" and "follow-along right" (when a major shareholder sells shares, he can request minority shareholders to sell them together, or minority shareholders have the right to sell them along with the major shareholder).
2. Constraints of core personnelThe term of office of the founders or core technical personnel, and the handling of shares after their departure (such as mandatory repurchase, lock-up period restrictions); if the departure of core personnel affects the company's operations, are investors entitled to compensation?
3. Enterprise termination and liquidationLiquidation procedures during corporate dissolution and bankruptcy; order of distribution of remaining assets (creditors, preferred shareholders, common shareholders); shareholders' obligations to assist during the liquidation process.

(iv) Dispute Resolution and Liability for Breach of Contract: Providing an "Avenue" for Disputes

1. Liability for breach of contractClearly define the criteria for identifying breaches of contract by each party (such as failure to contribute capital as agreed, unauthorized transfer of shares, disclosure of confidential information, etc.); and the corresponding compensation methods (such as payment of liquidated damages, compensation for actual losses, and termination of the contract).
2. Dispute resolution methodsThe agreement should prioritize negotiation; if negotiation fails, arbitration (with a clearly defined arbitration institution, such as the Taiwan Arbitration Centre) or litigation (with a clearly defined court of jurisdiction, such as the court where the company is located) should be chosen to avoid escalation of the dispute due to "unclear resolution methods".

IV. Why are most contracts "mere formalities"? The key lies in "professionalism".

Many investors and businesses believe that simply "downloading and modifying templates online" will suffice for contracts, unaware that this is often the beginning of disputes. Taiwan's Company Act and Mergers & Acquisitions Act contain numerous mandatory provisions regarding equity investments, and the interpretation of contract terms in judicial practice is extremely strict. Non-professionals are prone to issues such as "illegal and invalid stipulations" and "vague and unclear clauses." For example, an investment contract stipulating that "preferred shareholders may unconditionally demand a buyback" failed to consider the rights of creditors during company liquidation and was therefore deemed invalid by the court for harming creditors' interests.

Therefore, a contract that can truly mitigate risks must be drafted with the participation of professional lawyers familiar with company law, investment practices, and judicial practice—not only to ensure that the terms are legal and valid, but also to be "tailor-made" in combination with the company's industry characteristics, shareholder structure, and business objectives.

The essence of equity investment is a balance between trust and rules, and a well-developed investment contract and shareholder agreement are the best vehicles for achieving this balance. Rather than spending huge sums on litigation after a dispute arises, it is better to invest the effort beforehand in drafting a proper contract—this is the most economical and effective way to avoid equity disputes.

Fuda Law Firm
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