Shareholder’s Agreement

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Understanding a Shareholders’ Agreement

A shareholders’ agreement, also popularly known as a stockholders’ agreement. In short, the agreement of a shareholder is a contract between the business and its shareholders. It sets out the rights, the responsibilities of the shareholders, and the rules relating to the company’s management and the authorities. The agreement aims to protect the interests of the shareholders, in particular minority shareholders, i.e. those who hold less than 50% of the company’s shares.

A shareholder agreement is formed to protect both the corporation and its shareholders. This guarantees that shareholders are equally compensated. Minority owners, who typically have little control over company activities, may also benefit from it.

It defines for shareholders what their rights and responsibilities are and how it is possible to distribute or sell the shares. It explains how the company will work and how important decisions will be taken for the company.

Drafting a shareholder agreement while setting up the business or issuing the first shares is optimal. This enables entrepreneurs or shareholders to have a shared understanding of what they want to provide and obtain from the company. If investors find it difficult to overcome the major disputes and reach a consensus on the agreement of a shareholder, their partnership relationship can need to be reconsidered.

Investors may also draw up a shareholder agreement at a later date; but as the company runs, their perceptions may further diverge. It can make a consensus more difficult to achieve.

Benefits of a Shareholders’ Agreement

A shareholders’ agreement is of the choice. In various instances, the contents and provisions differ. The knowledge depends on the existence of the company, the class of shares, and several other considerations. There are essential components that the agreement of each shareholder includes. Examples include the number of shares issued, the date of issue, and the shareholders’ percentage of ownership.

The selling and transfer of shares to third parties is often determined by shareholder agreements. They also illustrate how shares are treated if a shareholder dies. A pre-emption provision ensures that new shares are available to current shareholders before they can be issued to other potential shareholders.

Details on dividend payments and the distribution of earnings are also covered by a shareholder agreement. It contains provisions concerning the frequency of board meetings and the appointment or resignation of directors with regard to business operations. It also outlines how the processes for different decision-making levels will be.

Competition restrictions and a deed of adherence also include many shareholder agreements. A shareholder is prevented from competing with the company because of competition and restrictive agreements.

For example, they are not permitted to work with an opponent firm in the same geographic area. It is necessary, as it preserves the company and the interests of other shareholders. A deed of adherence secures new shareholders to adhere to the pre-existing shareholders’ agreement.

Needs for a Shareholder’s Agreement

In order to dissolve any dispute between the shareholders and the company, a shareholder agreement is entered into. We can’t be sure that nothing will ever go wrong, and in such cases where nothing is certain, such agreements help us to resolve disputes if they happen and maintain a healthy relationship between the shareholders and the company.

It also helps protect a shareholder’s investment and lays down the rules & regulations for the shareholders and any other company related party. Regulating a shareholder agreement is important because not every shareholder is the same. It is necessary to draw up an agreement taking into account that each individual is different and has a different opinion on the subjects or subject matter concerned. And that they may agree with each other or may not.

Benefits of Creating a Shareholder’s Agreement

The creation of a shareholder agreement has different benefits. Those are as follows:-

Contents of a Shareholders’ Agreement

The shareholder agreement usually consists of provisions relating to the interests of the shareholder in relation to the following matters:

Rights of a shareholder

As a shareholder, with respect to the organization, an individual is entitled to certain rights. Some of them are as follows:-

  • Right to vote
  • Right to call for a General Meeting
  • Right to appoint directors
  • Right to appoint the company auditor
  • Right to copies of the financial statements of the company
  • Right to inspect the registers and books of the company

Regulations with regard to sale and transfer of the share of the company

In order to protect the interests of the shareholders when it comes to the question of the transfer of shares, such rules are put in place to ensure that such a transfer occurs only upon the consent of the parties concerned.

Financial needs of the company

As copies of the financial statements are provided to shareholders, they are able to track the company’s progress and needs. In the event that shareholders find the need for an influx of funds that they believe will benefit the company’s growth, they will then address the most lucrative source of financing and then proceed to obtain it. The process for receiving such funds is laid down in the agreement with the shareholders.

Requirements with respect to a quorum

A quorum refers to the minimum number of members needed to be recognized as a proper meeting for a meeting. The quorum conditions will be specifically alluded to in the Shareholders’ Agreement.

Valuation methods for the shares of the company

The value of the company’s stock often varies, as the market is subject to frequent fluctuations. However, the method of valuing the company’s shares still plays an important role and has a material effect on the financial statements in order to assist in the proper preparation of the financial statements. The valuation approaches include:—

  • Assets Approach
  • Income Approach
  • Market Approach

The manner in which the company will be run

Certain policies and procedures must be put in place in order for smooth and free-flowing operations to occur. The Shareholders’ Agreement provides instructions for how to operate the business on a regular basis to ensure a clear and uninhibited workflow.

Liabilities of a shareholder

  • Shareholders are not liable for the acts of the company
  • Shareholders are held liable only to the extent of the unpaid amount of share capital with regard to the share held by them
  • Where it is a company limited by guarantee, the shareholder is liable only to the extent of the amount guaranteed by him
The purpose behind the limited liability of the shareholders surges down to the fact that the company is a separate legal entity, therefore separate from the shareholders.

Protection of minority shareholders

Minority shareholders are those who, when it comes to company management, do not enjoy much in terms of control. The interests of minority shareholders have been given significance since the implementation of the Companies Act, 2013.

  • Right to apply to the Board in case of oppression or mismanagement
  • Right to institute a class action suit against the company and the auditors
  • The requirement to appoint Small Shareholder Director
  • Where the majority of shareholders sell their shares, then the minority right must also be included. This concept is termed as Piggy Backing.

Shareholders’ Agreement and Minority Shareholders

Those who own less than 50 percent of a company’s stock are minority shareholders. Since the majority decision is preceded by the business operation of most businesses, minority shareholders typically have little influence over the business. Laws have been developed to protect the rights of minority shareholders; however, there is minimal security, as it may be expensive or technically difficult to implement.

An agreement with shareholders will protect minority shareholders. One way is through the provisions for such decisions that require universal approval. The decision will not be accepted as long as one shareholder disagrees, irrespective of how much that shareholder owns in the business.

Decisions that are bound by the necessity of majority approval typically include the issuing of new shares or bonds, a change in the structure of capital, the appointment or removal of directors, and adjustments to major operations. The unanimous approval requirement also comes with disadvantages, despite benefiting the minority shareholders. It can slow down the process of decision-making and decrease performance.

The “tag-along” clause is regarded as another provision that can protect minority shareholders. If anyone offers to buy shares from a controlling shareholder, the rule applies. If the same bid is made to all the other shareholders as well including the minority ones, the shareholder is not permitted to sell. This means that the minority shareholders are equally compensated. They should be capable of earning the same returns as others.

Steps to Create a Shareholders Agreement

Termination of a Shareholders Agreement

A shareholder’s termination can be carried out in three ways:

Mutual Termination

This termination includes decisions made collectively by all the owners involved in the deal. Reasons for all of them may vary, but for termination, consent must be there. In general, mutual termination happens when the business is going to dissolve quickly and shareholders want to sell their shares.

Automatic Termination

This form of termination happens when there is an infringement of some kind and there is no other way out. If there is a provision for handling such a violation in a specific way, then it will be resolved in that manner.

If one of the shareholders wishes to leave the company, then the arrangement will be terminated. Generally, unique provisions exist in such situations as to how to deal with it?”

Tips to consider while drafting a Shareholders’ Agreement

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Frequently Asked Questions

The Shareholder’s Agreement is similar to a contract creating a link between the shareholders of a corporation or a business. The relocation of shares, rights, obligations, company activities, etc is a shareholder agreement in India.

The Shareholder Agreement can easily be enforced online. But to complete the application process, you will need a professional. Call us on 8750008881 for further information.

Our packages for fixed-fee shareholder arrangements start at Rs.6500. This includes a shareholder agreement drawn up to satisfy the company’s requirements, telephone consultations with a lawyer from Legalraasta, and a complimentary update to the draft we provide you with. Call us on 8750008881 for further information.

You can get the detailing of documents for the Shareholder Agreement online. But you would need a specialist to complete the application process. For further information, call us at 8750008881.

You can get the procedure detailing of the Shareholder Agreement online. But you would require a specialist to complete the application. For further information, call us at 8750008881.

A shareholder agreement may determine how the company can access funds and whether, following their relative interest in the company, the shareholders are responsible for contributing those funds.

A shareholder agreement is a legitimately binding arrangement between a company’s shareholders. Even though it is not a legal necessity to have a shareholders agreement in place it is strongly advised to do so as it protects the shareholders from any potential conflicts.

1. Funding/contributions from shareholders. The shareholder agreement should explain how the shareholders finance the purchase of their shares
2. Director appointments
3. Management, responsibilities, and information
4. Dividends and investment
5. Transfers of shares
6. Exit plan
7. Default
8. Deadlocks and disputes

Every shareholder needs to sign the Shareholders’ Agreement. Also, a representative of the company must sign.

An agreement may usually only be altered by a unanimous agreement between the owners or partners. Both the owners or associates will need to draft and sign a deed of variation, or an entirely new arrangement.


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