All you need to know about the Shareholder’s Agreement

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Shareholders are the essential part of an organization where they are assumed to be the owners of an organization after purchasing or holding shares of such organization. They are someone who pool in the money into the company. Hence, by investing money, they also have a right to vote on various matters in relation to the business activities of the organization. To seek more confidence and protection, the company and the shareholders must enter into a legal agreement which is known as Shareholder’s Agreement. Every company must give priority to such agreement to avoid any kind of unforeseen contingencies which may arise in future.

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Here, in this write up, we will discuss about various aspects related to the Shareholder’s Agreement, along with its key components and importance.

Understanding Shareholder’s Agreement

A Shareholder’s Agreement is an important legal contract between the company and its shareholders. The main purpose of creating Shareholder’s Agreement is to establish a fair and transparent relationship between the company and the shareholders. It defines the rights and obligations of the shareholders which also includes minority shareholders.

Advantages of Shareholder’s Agreement

Some of the advantages of Shareholder’s Agreement are as follows:

  • Shareholder’s Agreement entitles rights and powers of a shareholder.
  • It acts as a dispute resolution system
  • Company can give assurance to minority shareholders and investors
  • Guidelines on installments and profits can be set out clearly
  • It creates a healthy relationship between the shareholders and the company
  • This Agreement safeguards the investment made by the shareholders as it well define the terms and regulations

When should the Shareholder’s Agreement be made?

It is important that shareholder’s agreement is well drafted in the beginning only when the company is incorporated and is ready to issue its first share. This will help the shareholder’s to know and have a understanding about the expectations of the company. They would know about what they receive and offer to the company.

Both the parties must agree to the agreement and must define their expectations. It may differ from person to person. Some individuals might think that a shareholder’s agreement is not necessary, but it is indeed highly advisable by Legal Window.

Key Elements of a Shareholder’s Agreement

The most important elements which must be well included in a Shareholder’s Agreement are as follows:

  • Definitions and Interpretations: A Shareholder’s agreement must start with the basic definitions of the legal terms and their interpretation used in the agreement. The Legal terms include the applicable Act, type of agreement, affiliate, Angel investor, Article, CCPS, Confidential Agreement, Encumbrance, Equity Shares, Reserved Matters, Transfer and many more. To avoid any type of misconception and dispute between both the parties,  it is compulsorily required to define all the terms clearly
  • Effective Date: The effective date means the date from which the agreement shall become effective. It also includes tenure of the agreement.
  • Constitution and Operation: The company shall state that it is structuring the business in accordance with this agreement and is complying with the rules and regulations as mentioned in the Memorandum of Association (MOA) and Articles of Association (AOA) of the company.
    On the other hand, in case any of the provisions of the agreement are inconsistent with the MOA and AOA, the terms of this agreement shall prevail, to the extent of the inconsistency.
  • Name and Place of the Business:
    • The agreement must clearly name of the company with its date of incorporation. Apart from it, name of the promoters and investors who jointly agree to invest in the company must be mentioned
    • Secondly, complete address of the registered office of the company where it is situated must also be mentioned. This clause must further include the brief summary of the business activity of the company and a declaration that company shall not carry any other activity without Board’s Consent.
  • Investment: Complete Disclosure of the investment of the company must be included in the following format:
S.No Shareholder’s Name Number of Shares Value per share
1 A 100 20.00
2 B 250 20.00

Moreover, it must be declared that no further issue can be made by the company without the consent of the promoters or business owners/founders.

  • Roles and Responsibilities of Promoters and Business Owners
    • The promoter is responsible for the day to day functioning of the company.
    • Promoters will protect the interest of the shareholders and will act in good faith for the interest of the company.
    • Promoters hold executive post in the company
    • Directors and promoters will be responsible for taking independent decisions regarding their defined areas and will be bound by the terms and conditions of this agreement.
  • Voting: There are Various Matters on which the decision cannot be taken by the board unless the prior consent of members or shareholders is obtained by the resolution. Such matters are as follows:
    • Increase in the share capital of the company.
    • Dividend Declaration
    • Approving the annual budget of the company
    • Transfer of shares.
    • Amendment or repeal of any provisions of, or adding any provision to, the company rules.
    • Changing the nature or scope of the business of the company.
  • Resolution of Dispute: In any case of dispute between the parties, it shall be resolved by the mutual consent of the parties in a Board Meeting or Shareholder’s Meeting
    In case the dispute is not resolved in any meeting, it shall be resolved by the arbitrator and the decision of the Arbitrator shall be final. An arbitrator shall be appointed by the mutual consent of the parties.
  • Auditors: The Name and tenure of the auditor who shall audit the financials of the company must eb disclosed. The company’s auditor shall not be changed without the consent of the directors and the shareholders.
  • Other Important Elements: Apart from the above important elements, a shareholder agreement may also include the following:
    • Transfers Upon Death Of Spouse
    • Lifetime Transfers
    • Closing
    • Exercise of Option
    • Call and Put Option
    • Binding Effect
    • Free End Clear Of Encumbrances
    • Authorization
    • Notices
    • Pro Rata Allocations
    • Insurance
    • Inclusion Of Marital Property

Procedure of drafting a Shareholder’s Agreement

All you need to know about the Shareholder’s Agreement

Legal Window helps you in drafting a Shareholder’s Agreement as follows:

  • An expert lawyer from our team will contact you and will guide you the complete process and importance of shareholder’s agreement as required by you.
  • You need to specify our expert lawyer regarding the objective and need of such agreement by you
  • Once all the objectives are well understood by our legal expert, he/she will draft a Shareholder’s Agreement for you accordingly
  • As soon as the draft of the agreement is prepared, it will be forwarded to you for your review. In case any changes are required by you, it will be done by our expert right away.
  • The complete process will be done within 2-3 days.

Get Agreement drafted from Experts

Key Points to remember while drafting a Shareholder’s Agreement

  • Understand the main purpose of drafting a Shareholder’s Agreement, keeping in mind the interests of both the parties
  • Clearly define the terms of the agreement while drafting an agreement, to avoid any misconception or confusion
  • Specify rights, duties and obligations of both company and the shareholder
  • The terms and conditions of the agreement must be such that it gives benefit to both the parties
  • Guidelines, rules, and procedures must be in a brief and summarized manner
  • All matters must be as per the prevalent laws and Acts as applicable to such agreement

Conclusion

To give a legal structure to the relationship of a shareholder and the company, the concept of Shareholder’s Agreement came into picture. It is a basic foundation on which he business gets a start and protection which ultimately is in the interest of an organization. However, the agreement must be well drafted and must not be poorly drafted, which in turn can disrupt the legal relationship of the company and the shareholder, resulting in economic losses.

To avail the services of drafting a Shareholder’s Agreement, contact Legal Window now

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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