Shareholders' Agreement

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SHAREHOLDERS AGREEMENT

A shareholders' agreement is an agreement between the shareholders and company or among members inter se. In practical effect, it is comparable to a partnership agreement. There are advantages to the shareholder's agreement like it helps the corporate entity to maintain distance from publicity and keep the secrecy.

It prescribes the rights, duties, and obligations of the shareholders and provisions related to the management of the company. The prime object of the agreement is to protect the rights of the shareholders, especially minority shareholders.

Strictly saying, the relationships amongst the shareholders, and those between the shareholders, and the company are governed by the Memorandum and Articles of Association of the company. However, where there is a comparatively small number of shareholders, it is common to execute some supplemental document known as the Shareholder Agreement. There are multiple reasons to supplement the Memorandum and Articles of Association of the company.

Reasons of Shareholders Agreement

A company's Memorandum and Articles of Association are available for public inspection, whereas, the terms and conditions of a shareholders' agreement, as a private agreement, are private and confidential between the parties.

Contractual arrangements are generally easy, and less formal to execute, modify, revise, or terminate.

The shareholders may want to resolve the dispute(s) by arbitration, or in the courts of a foreign country (where a country other than the country in which the company is incorporated). Because in some countries, their respective corporate law does not allow such dispute resolution clauses to be incorporated in the constitutional documents.

Greater adaptability; it can be very well anticipated that business transaction requires flexibility it is difficult to always make amendments in Memorandum and Articles of Association of the company, so Shareholders Agreement comes into the picture.

Where the legal system in a particular country does not provide adequate protection to minority shareholders in such case Shareholders' Agreement can be proved game changer.

With the help of such an agreement, method and formulae can be decided to compute the value of the shares. Since the methodology of valuation is decided, no future dispute arises between the company and shareholders regarding the valuation of shares.

Restrictions can be imposed on the activities of shareholders to prevent them from misusing of position in a company.

Significant clauses in Shareholder Agreement

Rights of a shareholder

Shareholders are entitled to certain rights some of them are mentioned below:

  • Voting right
  • Right to call General Meeting
  • Right to appoint the statutory auditor
  • Appointment of Directors
  • Removal of Directors
  • Right to copies of the financial statements of the company
  • Right to inspect the registers and statutory books of the company
Sale and Transfer of Shares

Date of agreement.

Training:

In case of issue or transfer of shares, to protect the right of the shareholders, there are certain regulations put in place to ensure that such transfer takes place only upon receiving the consent of the parties involved.

Financial needs of the company

The shareholders have the right to have access and inspect the financial statement of the company they can go through the balance sheet and other financial records and come to the conclusion that the company needs financial assistance. The procedure for obtaining such financial assistance is laid down in the Shareholders Agreement.

Requirements concerning a quorum

A quorum is a minimum number of members who are required to hold a valid meeting. Shareholders' agreement may provide for such a number to hold a valid meeting. But it must be kept in mind that number of quorum provided in Shareholders Agreement must not, in any case, contradict the provisions of Companies Act, 2013

Valuation methods for the shares of the company

As the market is very uncertain, the values of shares are also got affected. It is prevalent and advisable to introduce the method of valuation of shares in the Shareholders Agreement to prevent any future dispute regarding Share Valuation.

The manner in which the company will be run

To conduct business operations smooth and free-flowing there should be some policies and procedures are laid down. The Shareholders’ Agreement has principles regarding the working and management policies of the company.

Liabilities of a shareholder

As we all know shareholders are owners in the company and incorporate format ownership and management are distinct. Hence shareholders are not liable for the operation of the company. Even they cannot be expelled as a member.

However, the liability of shareholders exists only to the extent of the unpaid amount of share capital concerning the share held by them.

In case of a company limited by guarantee, the shareholder is liable only to the extent of the amount guaranteed by him

Protection of minority shareholders

Minority shareholders are those who do not have much power when it comes to voting power in the Company. Since the introduction of the Companies Act, 2013, minority shareholders possess the following rights.

  • Right to apply to the Board in case of oppression or mismanagement
  • Right to institute a suit against the company and the auditors
  • Requirement of appointment Small Shareholder Director

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