When we enter the exciting business and financial world of Canada, we understand that the security of our investment is essential, and it is then that we begin to see the importance of having contractual documents and legal guidelines that protect our rights as investors and define the duties and obligations within the company. 

Three key instruments to achieve this are Subscription Agreements, Promissory Notes and Pledges, each with specific functions that guarantee stability and protection.

In this blog, I will discuss how these instruments can strengthen your investment and ensure your company's success. Read to the end and find out how to use them to your advantage. Let's get started!

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What is a Subscriber Agreement?

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A Subscription Agreement is a contract whereby an investor agrees to contribute capital to a company in exchange for the issuance of shares or participations. This document clearly and precisely establishes the terms and conditions under which the investment will be made. 

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Aspects that are usually included include:

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• The amount of the investment, i.e., the specific amount of money the investor will contribute.

• The price of the shares or units to determine the value at which they will be subscribed.

• The rights and obligations of the investor, such as participation in profits or decision-making, and the obligations of the issuing company.
• The closing conditions, which describe the requirements that must be met for the transaction to be completed, such as verification of the company's financial condition or the approval of certain corporate bodies.

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The careful drafting and review of a Subscription Agreement ensures that both parties are clear about their commitments, which is essential for a transparent and secure investment relationship.

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What is a Promissory Note?

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The Promissory Note is a written document in which a person (or entity) unconditionally agrees to pay a specified amount of money on a specified date or on demand. This instrument is frequently used in short-term financing and in situations where a clear and legally enforceable promise to pay is required. 

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Among its features, the following stand out:

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• The obligatory nature of payment, since the debtor undertakes to pay the stipulated sum, which turns the promissory note into a credit tool.

• It involves a payment deadline, because it establishes a deadline or an event that triggers payment.

• Manages interest rates or penalties. In some cases, the promissory note may include interest terms or additional charges if there is a delay.

• It is easily enforceable, since, being formally drafted and signed, the promissory note is presented as a legal document that facilitates legal action in case of default.

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Accurate wording and a thorough review of the promissory notes are essential to reduce risk and ensure that the promise to pay is valid and enforceable.

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What are the Garments?

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The concept of pledge refers to the agreement whereby a debtor delivers an asset as security for the performance of an obligation, generally a loan. This asset may be movable, immovable or even certain securities, depending on the agreement between the parties. 

Three key features of a Pledge Agreement in the business world are:

• Provides security over personal property (such as machinery, inventory or vehicles) as a payment liability. This means that the creditor is entitled to that property in the event of default.
• It handles an accessory contract. The pledge does not exist on its own, but is attached to a principal obligation, such as a loan or debt. Its purpose is to secure the performance of that obligation.
• Gives the creditor a preferential right. If the debtor defaults on payment, the creditor has the right to foreclose on the pledge, which allows the creditor to sell the collateral to recover the outstanding debt.
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Procedure in case of noncompliance

In this scenario, the steps to be taken if the debtor does not comply with its obligations are established, allowing the creditor to execute the guarantee and recover the amount owed.

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Accuracy in the wording of the Pledge Agreements is essential for the collateral to be sound and enforceable in the event of a dispute over the performance of the pledge.

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Recommendations for Latino investors in Canada

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The proper use of Subscription Agreements, Promissory Notes and Pledges allows investors and lenders to effectively manage their risks and build secure business relationships. In an environment such as Canada's, where economic stability and investment opportunities are ample, having these documents in place is a pillar that underpins business success. 

At Immiland Law, we recommend that:  

• Seek expert legal advice before signing any agreement. Consult with lawyers who are experts in Canadian corporate law. 
• Review each document in detail and make sure the terms are clear and protect your interests. 
• Consider the legal structure of your company depending on your type of business, as certain agreements may be more beneficial than others. 
• Do not underestimate the importance of collateral; a well-structured agreement can be key to securing financing. 
• Keep up-to-date records. Remember that well-organized documentation facilitates business management and prevents future conflicts. You can find more information in: Corporate Record Keeping in Canada.

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At Immiland Law, we offer specialized legal advice for Latino investors in Canada. If you wish to protect your investment and structure solid Subscription, Note and Pledge agreements , contact us for personalized guidance.

I hope this topic will be useful for the success of your company. 

Thank you very much for reading, see you in the next blog!

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With love,

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Immiland Law