Overview of the Shareholder's Agreement
Shareholder's Agreement is similar to a contract determining the liaison between a company's shareholders or a business. A shareholder's Agreement in India comprises the relocation of shares, rights, duties, business operations, etc. Moreover, it also speaks how crucial verdicts and decisions are made in considering all the clauses.
What are the subjects of a Shareholders' Agreement?
Shareholder's Agreement usually consists of the provisions concerned to the shareholder's rights in terms of the following matters. Those are as follows:-
Rights of a shareholder
A person is entitled to certain rights as a shareholder concerning the company. Those are as follows:-
- Right to 'call for a General Meeting.
- Right to 'vote.'
- Right to 'appoint the company auditor.'
- Right to 'appoint directors'
- Right to 'inspect the registers and books of the company'
- Right to copies of the 'financial statements of the company'
Sale and transfer of the share of a Business: Regulations
There are specific rules put in place when it comes to the issue of transfer of shares, protect the interest of the shareholders, and ensure that such transfer happens only upon in receipt of the consent of the parties interested.
Financial Requirements of a Business
Shareholders can track the progress and the needs of the company as they are given copies of the financial statements. Shareholders will discuss the most lucrative source of funding and then proceed in the direction of obtaining it in the event where the shareholders find the need for the arrival of funds, which they think shall be beneficial to the growth of the business. The whole procedure for obtaining such finances is laid down in the Shareholder's Agreement itself.
A quorum denotes the minimum number of members who are compulsory for a meeting to be deemed a valid meeting. The requirements will be mentioned in the Shareholders' Agreement concerning a quorum.
The value of the company shares varies as the market is prone to constant fluctuation. However, the method of valuing the company's shares also shows a significant part. It has a material influence on the financial statements to aid in the proper preparation of the financial statements. The methods of valuation include:-
- Assets Evaluation Approach
- Income Evaluation Approach
- Market Evaluation Approach
Running of a Company- Manner
There must be specific procedures set and policies in place for there to be free-flowing and smooth operations. The Shareholders' Agreement covers the guidelines in terms of how the company will be run on a daily basis to safeguard the uninhibited and consistent workflow.
Shareholders are not accountable for the actions of the company. They will be held liable only to the extent of the unpaid amount of share capital in terms of the share held by them. The shareholder is responsible only to the extent of the amount guaranteed by him if it is a company limited by guarantee.
The object behind the 'limited liability of the shareholders' boils down to the fact that - the company is known to be a 'separate legal entity'; hence it is separate from the shareholders.
Security for minority shareholders
When it comes to the company's management, the minority shareholders are those who do not appreciate much in terms of powers. Moreover, the rights of the minority shareholders have been given significance since the introduction of the Companies Act, 2013.
- Right to apply to the Board: It has been given importance in case of mismanagement or oppression.
- Right to establish a class action suit against the auditors and the company
- The obligation to appoint 'Small Shareholder Director.'
- Piggy Backing: The minority right must also be included in the majority of shareholders sell their shares.
What are the benefits of creating a shareholder's Agreement?
There are various advantages to creating a shareholder's Agreement. Those are as follows:-
- Distinction of Authority
A shareholder's Agreement clears the authority in India. It also distinguishes the standing of a shareowner, and the license you stock. It is because the issuer of such shares symbolizes the risks and power for all. Also, it arbitrates as a governor of the interaction between all big and small shareholders in a company.
- Allows Amendments
A shareholder's Agreement enables the correct conditions for constructing amendments to the company's constitution. It is suitable for 'medium and small-scale' businesses that do not wish to officially change the whole constitution whenever small changes are essential to be made from time to time basis.
- Protection of Minority
Any company might have a minority and a majority shareholder. A shareholder's Agreement states the role and protects the rights of minority shareholders in a company.
- Easy Purchase of Share
A minority shareholder will have access to purchasing shares from other shareholders just like a majority shareholder.
- Control Achievement
A shareholder's Agreement will ensure that shareholders have a legal association with the company, including setting or modifying rules and guidelines.
- Care for Positions
Shareholder's Agreement safeguards the position or roles of shareholders, within a company, are protected.
- Shareholder Restrictions
Restrictions on matters that can be decided by shareholders can be included in the Agreement.
- Safeguard Privacy
As the Article of Association of any company is made public, the terms of shareholders are kept private always.
What a shareholder's agreement should include in the Checklist?
Clauses in a Shareholders' Agreement
- Responsibilities of Shareholders
All will have their roles and duties well-defined to those who are party to the agreement. At this moment, the composition of the board may also be specified. The relationship between majority and minority shareholders, and the board and other shareholders should also be monitored/mentioned.
- Given Special Rights
Expect to be on a higher plane if you're desperate for money from a VC. This may be via additional seats on the board, preferential rights, and many other elements as well.
- Address Questions
Many terrible things can happen to a company which is largely not expected in general. A bank may pull funding, some shareholders may want to leave, or some documents may have found not to have been in order or invalid. All these consequences of each of these can be deliberated in this agreement.
- Constraints on Transfer
Some restrictions may be occupied on the transfer of shares in Shareholder's agreement. Right of first offer and Right of first refusal are two standard clauses that must be included. Moreover, Buy-back rights may also be defined in the agreement.
- Assigning Periods
The agreement will state the vesting period for each Shareholder. It will direct what will happen to the shares if a director needs to leave, and when they are deemed to have been presented for sale to the company and other among shareholders.
- Details of Warranties
Investors will expect that all the assets and liabilities of the company have been revealed to them. As a consequence, the directors will usually grant warranties to investors up to a quantified amount.
CorpBiz Shareholder’s Agreement Registration Procedure
A Shareholder shall be prepared with careful consideration. Plenty of time should be allowed for all stages of drafting and Convincing. It is advisable that an attorney with significant ' Corporate Law experience' must be appointed to overwhelm many of the potential pitfalls that creep around within the Shareholder’s agreement.
CorpBiz recommends you that you should be in contact with an advisor/lawyer to understand the requirement in detail. The elementary information would be mandatory from your end to start the process. Upon contact, your request to file for a Shareholders’ Agreement will be received and our representative will be in touch with you to take your request forward. The lawyers will begin working on your document once all the information is provided, and the payment is received.
We will call you as and when required if we need more information from your end. Our in-house lawyers and legal experts will create the shareholder's agreement 1st draft after we receive all your details, and send it across for your view within two-four business days. You can evaluate the document, and intimate for the corrections in case of any alterations
Your shareholder’s agreement includes two rounds of reiterations. Therefore, our lawyers will do the needful and send it across to you for your approval once again if you need any changes done to the shareholder's agreement format.
CorpBiz is one of the platforms which coordinate to fulfill all your legal requirements and connect you to consistent professionals. Yes, our clients are pleased with our legal service! Because of our focus on simplifying legal requirements, they have consistently regarded us highly and providing regular updates.
Our clients can also track at all times the progress on our platform. If you have any questions about the Shareholder’s agreement, our experienced legal advisors are just a phone call away. CorpBiz will ensure that your communication with professionals is charming and seamless.
What are the commonly made mistakes while drafting a Shareholder's Agreement?
One should keep in mind some commonly made mistakes; before proceeding with a Shareholders Agreement:-
The input of Ambiguous Provisions -Wrong/Unnecessary laws
The utmost craft must go into drafting a shareholder's agreement considering the importance of rights of the shareholder and such a deal in the working of the company. A Shareholder's agreement with unclear or vague provisions will raise disputes and open doors for never-ending litigation.
Moreover, it is more likely to be satisfied in full essence as then it establishes obligations, a strict web of rights, and manner of regulation if the terms of the shareholders' agreement are clear. To maintain the interests of both the parties and draft a sound agreement, it is for this purpose that one must choose a lawyer with skills of negotiation.
Forgotten to refer Capital Dividend Account
Shareholders get their 'capital dividends' without paying taxes by a Capital Dividend Account (CDA), a corporate tax account. Capital Dividend Account is essential while drafting any shareholders' agreement. It is no surety that as a shareholder, you should get the best tax benefits in future without such a clause relating to CDA and the payment of capital.
Indistinct reference for the Owner's Policies
It might not always be the ideal if an operating company is made the owner and beneficiary of any policy (such as a life insurance policy). This is so because an asset is determined based on the capital gain exemptions; it creates for a corporate-owned structure. Therefore, a life insurance policy is not continuously the best-suited.
Unrefined Drag-Along and Tag-Along Rights
The tag-along right requires majority shareholders to allow the minority shareholders to sell their shares at the same price. In contrast, Drag along rights enables the minority to sell their shares. All these rights are super crucial for start-ups companies.
If 1 or more shareholders are selling their shares, the tag-along rights give protection, higher liquidity, and exit route for minority shareholders. However, the drag-along rights do not allow the blocking of the company (supported by the majority shareholders) by the minority shareholders. Those are known to be preventive by nature. Such rights should be visibly stated in a shareholders' agreement, and else it takes malicious forms for the development of the company.
Note:-Both these clauses balance each other out.
The sales and purchase of the demised shareholder's shares should be made mandatory upon the event of the death of a shareholder. Any unpredicted circumstances may be omitted here. The choice of a buyout may be attractive for existing and new shareholders. Moreover, the clause must be made flawless so that your business is not put in danger while expecting the disposal of the shares.
You may also want to know the difference between a Shareholders' agreement and a Share Purchase agreement before drafting. Get in touch with CorpBiz expert lawyers to get your Shareholders' Agreement drafted flawlessly.
Tips for drafting a Shareholders' Agreement
- It is vital to understand the perseverance and purpose behind the Shareholders' Agreement and the necessity to create a balance of interests of the company.
- So as to avoid any further confusion, the terms of the agreement need to be clearly defined.
- The duties, rights, and obligations of the company and shareholders must be detailed in a crisp manner
- The agreement must be airtight bearing in mind the mutual benefit of both the company and the shareholders
- The procedures, policies, and guidelines set out in the shareholder's agreement must be brief and intelligible.
- All substances set out in the agreement must be delivered following the relevant laws in place. It means no vague provisions should be inserted.