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Pankaj Tyagi
| Updated: 22 Apr, 2022 | Category: Legal Agreements

Important clauses under the Shareholder Agreement

Important clauses under the Shareholder Agreement

Shareholders are the real owners of an organization. An agreement between the organization and shareholders specifying the rights and duties is known as the Shareholder Agreement. This write-up shall discuss the important clauses under the Shareholder Agreement in detail.

What is the Legal Significance of Shareholder’s Agreement?

A shareholder agreement serves as a legal instrument for resolving the dispute between the company and shareholders. There is no assurance about how long the company-shareholders relationship shall remain dispute-free. An unhealthy relationship often leads to the collapse of the company. This is where shareholder agreement comes into the picture. It helps in retaining harmony among the shareholders and strengthens the company-shareholders interplay.

Furthermore, it also ensures sufficient protection for shareholders’ investment and protects the interest of involved parties via different rules and norms.

Regulation of Shareholder’s Agreement is of paramount importance since every shareholder has different thought-process and opinions.

Subject matters of the Shareholder Agreement

A Shareholder agreement takes the following subject matters into account before coming into effect;

1. What will be the exact proportion of shares available to the concerned shareholder?

2. Is there is any necessity to set out a different class of shares for shareholders comprising the majority, minority, and founder shareholders

3. What will be the shareholders’ privilege when it comes to procuring newly released shares?

4. What would be the power of the Board of Directors on account of issuance or transferability of shares?

5. What would be the provisions around the transferability of shares?

Important clauses under the shareholder agreement

Following section entails important clauses under the Shareholder Agreement;

Consent of Shareholders

Consent of shareholder is one of the most important clauses under the Shareholder Agreement.  It comprises such situations and events where the consent of majority shareholders becomes a necessity. For instance, the consent of a shareholder becomes imperative in the given scenarios:

1. Appointment of the member of the supervisory board

2. Dividend Distribution and drafting a financial statement

3. Amending the Company’s AOA

4. Filing for bankruptcy or entering into an amalgamation

5. Company dissolution

Example of a consent clause

Where this Agreement facilitates that any particular subject matter seeks the approval of any shareholder, such consent may be given subject to such reasonable conditions and terms as that shareholder may levy, and any contravention of such requirements by any individual subject thereto shall be deemed to be a violation of the conditions of this agreement.

Resolving Disputes

The occurrence of disputes is apparent in company-shareholders interplay. Therefore, the company must formulate an arrangement beforehand for settling company-shareholders disputes.

In the status quo, companies generally choose out of court settlements such as conciliation or arbitration between the entity and shareholders.

Example of dispute resolution

“All disputes arising between the serving partners as to the operation, interpretation, or effect of any provision in this deed or any other subject matter, which cannot be reconciled mutually, shall be subjected to the arbitration of……..failing him/her to any other arbitrator opted by the partners in writing. The decision of said arbitrators shall be binding on the concerned parties.

Restrictions against transfer

A shareholders agreement entails such rules that contain the scope of share’s transferability. For this, written consent has to be secured by the serving shareholders. This is not applied in case of a member’s demise as shares are transferred to the legal representatives.

Right of first refusal

This right primarily safeguards the company and the active shareholders from the sales of stocks to a competitor entity or such parties with whom the company’s relation[1] has been compromised.

When some of the shareholders intend to sell their shares, a clause under the shareholder agreement should manifest that the shareholder who intends to sell their shares have to manifest the right to match an offer received from another party. This concept is referred to as the right of first refusal.

Buy-out Rights

Buy-out Rights sets out provisions for the expulsion of incompetent shareholders. It allows a company or existing shareholders to acquire the share of shareholder who was found unfit owing to certain major events, as shown below:

  • Death,
  • Disability,
  • Bankruptcy or marital dissolution,

Key points to be considered while drafting the Shareholder Agreement

  • One needs to comprehend the fundamental concept behind the utility of a shareholder agreement.
  • Every clause should serve a particular purpose and with utmost clarity. The inclusion of vague provisions or the presence of wide interpretations shall lead to a dispute in future.
  • Clearly, list out the norms and rights of involved parties
  • There might be instances where shareholders may no longer be interested in holding their allocated shares and wish to make an exit. Thus, for such a departure, there should be a clause in the shareholder agreement.
  • There should be an inclusion of the following subject matter in the Dispute resolution clauses
  • mode of dispute resolution
  • place of such dispute resolution
  • powers and duties
  • Restriction on shares transferability should be explicitly set out along with the process of the same.
  • Hire a professional to better understand the scope and delicacy of the shareholder agreement. This way, you can put probable grounds for disputes out of the equation.

Conclusion

Shareholder agreement has the utmost importance in the corporate landscape. The share allocation and transfer is a delicate subject matter and prone to dispute. Shareholder’s Agreement maintains a strong interplay between the company and shareholders by protecting everyone’s interest.  So that is all about the important clauses under the Shareholder Agreement. If you have any question relating to this subject matter then feel free to write us.

Read our Article:Know the Difference between Shareholder Agreement & Share Purchase Agreement

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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