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Pankaj Tyagi
| Updated: 07 Apr, 2021 | Category: Legal Agreements

Know the Difference between Shareholder Agreement & Share Purchase Agreement

Shareholder Agreement Vs. Share Purchase Agreement

Do you often get confused between the term shareholder agreement and share purchase agreement? The agreement which is entered between the organization and the shareholders outlining the obligations right is regarded as the Shareholder’s Agreement.

Shareholder’s agreement is primarily entered to rectify the disputes that occurred between the company and the Shareholder. Meanwhile, the Share Purchase agreement is a document that legalizes the process of transaction of share held between the buyer and the seller. In this write-up, we would look into some fundamental differences between these two terms.

Difference Between Share Purchase Agreement & Shareholder Agreements

Share Purchase Agreement Shareholder Agreement
It is a legally-binding agreement drafted for the purpose of transfer of shares from the seller to the buyers. It is an agreement entered into to define the obligations & rights of the company and the shareholders.
Such an agreement is entered into between a seller & a buyer A Shareholder Agreement is entered into between the company and the all the shareholders or between the company and class of shareholders.
This agreement’s primary goal is to manifest how much shares are to be transferred & at what price. A Shareholder Agreement is entered into to safeguard the investors’ investment by defining the rules & regulations of a shareholder.
The scope of the share purchase agreement is somewhat narrower as it only manifests the shares’ transfer from the seller to the buyer. A shareholder agreement’s scope is relatively broader as it defines what obligations and accountabilities, and power a shareholder will get in the organization.

Understanding the Significance of Shareholder Agreement

Maintaining a healthy relationship with shareholders is a tedious undertaking for any company. Shareholder agreement bridges the gap between the company and shareholders which are likely to turn into conflict in the future.

Every company (including the one witnessing impressive growth) once in a while run into a state of crisis where they find it hard to obliterate disputes with their Shareholder. And that’s where a shareholder agreement comes in handy. It brings transparency to the company-shareholder relationship by getting rid of prejudice[1] and potential barriers that could prove detrimental to the business in the future. Shareholder agreement helps secure the Shareholder’s investment and lays down the rules for the members and other individuals related to the company.

A shareholder agreement is a mechanism that safeguards an organization from losses & protects the company interest. It is intended to ensure that shareholders are treated fairly. The agreement contains a section manifesting the fair pricing of the shares. It also empowers shareholders to decide the criteria for Shareholder’ selection and the protection of minority shareholding in a company. 

Read our article:Shareholders Meeting is Crucial to Your Business. Learn Why!

Insertions of a Shareholder Agreement

  • Date
  • Share’s numbers.
  • A capitalization table, manifesting Shareholder and their percentage of ownership.
  • Any limitation on share transactions.
  • Pre-emptive right for existing shareholders to buy out shares.
  • Information on payment in the case of company sale. 

Shareholder’s Agreement from Startup’s Standpoint

Many startups and entrepreneurs will intend to draft a shareholders’ agreement for the initial parties. This is to make sure of what parties originally proposed; if some dispute comes to light as the company thrives and changes, a written agreement can get rid of issues by serving as a reference point. Entrepreneurs may also wish to incorporate shareholder eligibility criteria and measures to counter issues raised by active Shareholders’ unavailability.

Startups need to make sure that the shareholder agreement consolidates the following clauses and sections:-

  • A preamble, giving detail about the company and its shareholders.
  • Recital list reflecting rationale and goals about the deal.
  • Details of optional versus compulsory buying-back of shares by the business if a shareholder gives his/her up
  • A right of first refusal clause, explaining how the organization proceeds for purchasing a shareholder’s securities before an outside party comes in for trade for the same.
  • Notation of share’s fair price, either re-estimated yearly or via a formula.
  • Detailed info about the insurance policy.

What is Share Purchase Agreement (SPA)?

The aim of the share purchase agreement is to prove that both the parties agreed to the conditions and how much amount of shares is to be transferred from the seller to the purchaser at what cost.

A share purchase agreement specifies the terms and conditions for the given share transaction. It usually encloses a long list of conditions incorporated with the consent of the involved parties. This agreement’s main objective is to authenticate the process of share transaction that is going to be held between the parties. The transaction will be deemed completed as soon as the parties signed the agreement. Such an agreement includes conditions, precedent, and covenant by the involved parties.

Technically, such an agreement refers to a legal contract between the purchaser and the seller. It includes a specific number of shares that are subjected to trading at the predetermined price. This agreement proves that conditions that laid the foundation of the contract were agreed upon mutually.

Share purchase agreement safeguards the interest of both parties during the transaction of shares. Being a legal contract, it encompasses various facet of the transaction. Both parties must go through the clause cited in the agreement and understand it’s thoroughly. Any transaction of shares that occur without a legit paperwork often gave birth of innumerable disputes. While transferring shares to another party, the seller must understand the significance of the share purchase agreement to the fullest and should draft it under the expert’s supervision.  

Conclusion

From the information above, it can be summarized that every legal agreement, whether share purchase agreement or shareholder agreement, is entered into to safeguard the investor and the organization from any future disputes. Both agreements are distinctive and have an unparallel significance.

You don’t need to enter into an agreement to sell or buy a share, but it is always imperative to give such transactions a written form to avoid future contingencies. Consider dropping your queries in the comment section if you need some help or clarification on this topic. 

Read our article:What is Share Purchase Agreement in NBFC?

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Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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