Shareholder Agreement, If a shareholder wants to invest money in a company, then he must be given a written agreement which states the relationship between the company and the shareholder, the shareholder’s rights and obligations.
A shareholder Agreement aims to protect the shareholders and treat them fairly, enabling them to take decisions in the company. A Company may involve both majority and as well as minority shareholders. The rights of the minority shareholders are more vulnerable than those of the majority shareholders. This agreement outlines the obligation of the majority shareholders to save the minority shareholders against any abuse or unfair practice.
Shareholder Agreement India
A shareholder’s agreement is just a contract determining the link between the shareowners of a business or a firm. A shareholder’s agreement in India contains the rights and duties, rearrangement of shares, actions of the business, and how critical verdicts and decisions are made. Shareholder’s Agreement are specifically drafted to provide specific rights, impose definite restrictions over, and above those provided by the Companies Act, 2013 (2013 Act).
How Minority Shareholders are protected in a Shareholder’s Agreement
A Shareholder with minimal influence in the company will lack control in the voting rights which take place in the Company and this could be one factor where they would be excluded from all major decisions taken by the company as they are not included to be important. Majority shareholders have more than 50% of the company and they consider to take any big initiate for the company since they have more influence than the minority shareholders in the Company.
The articles of association may protect the minority shareholders but anyhow by the power of the majority shareholders they may change the provisions just by getting it approved among the majority shareholders.
A shareholder Agreement restricts this ability of the majority shareholders to exclude and suppress the minority shareholders when it’s on giving opinion on issues of shares, debts along with appointment and removal of the directors.
How Are Majority Shareholders Protected In A Shareholder’s Agreement ?
Reading the above paragraph, it does not necessary mean that majority shareholders are a cause of trouble for every instance. This is wholly not applicable for majority shareholders but there may be instances where the minority shareholders become uncooperative. A Shareholder Agreement includes a provision which give the Majority shareholder the right to share either whole or any part of the shares even if the minority shareholders are not willing to accept this condition set up before them.
A minority shareholders are prevented from transferring their shares to the competitions of the company and of the Majority shareholders.
THE ADVANTAGES OF ENTERING INTO A SHAREHOLDER AGREEMENT
- The interests of the shareholders are protected- If any unanticipated event occurs where the company has to wind up or the company is acquired by another entity then the agreements is inserted with provisions which safeguard the rights of the shareholders which include the issuing of new stock or debt.
- Covers future disputes- This agreement deals with future disputes which may arise between the shareholders or the management team. It deals with the rights of the minority shareholders, shares valuation, voting’s of shares, restrictions for the transfer of shares and allotment of additional shares. This agreement is used as a document which protects the interest of the shareholders.
- DEFINES THE STAND OF THE SHAREHOLER– This agreement sets out the position you have as a shareholder in the company. It alongside defines the interaction which may take place between the shareholders during the board meeting and for the voting rights allotted.
- MINORITY SAHREHOLDER’S RIGHTS– This Agreement enables the minority shareholders from having access to purchase shares from other shareholders, the same right majority shareholders are given.
- PRIVACY– Even though the Articles of Association can be made public but the shareholder agreement cannot be disclosed with any third party outside the company unless the reason has been listed in the Agreement.
Shareholder Agreement Checklist
For a shareholder to be complete, the following provisions must be included which are-
- PARTIES- The description of the parties.
- BOARD OF DIRECTORS- Roles of the board of directors in the company since majority of the votes in a board meeting in necessary to pass a decision. This agreement decided on what duration must there be a board meeting and on what matters are the matter necessary.
- MATTERS WHICH ARE RESERVED. Shareholders are allowed to review matters which may seem to be detrimental to their interest and hence this agreement sets those matters which cannot be passed without having approval of significant signatories and approval of all shareholders.
- INFORMATION TO SHAREHODLERS- Shareholders must be updated with the company performance on a timely basis. This can be done through quarterly and by annual reports.
- TRANSFER OF SHARE CAPITAL- This agreement must outline the company’s authorized capital at the time of signature and provisions which refer to the share transfer for any certain event.
- AMENDMENT AND TERMINATION- The conditions for terminating and amending the agreement must be provided in the agreement.
GET YOUR SHAREHOLDER AGREEMENT DRAFTED BY A LEGAL EXPERT
Using a normal template which you may come across online is not the right template to proceed with. Such templates do not necessarily involve all the essential clauses which must be present since all the clauses in the agreement must be drafted by a corporate lawyer, keeping in consideration the role of the Shareholders and an outline of their rights must be listed. Hence, it is better legally to approach a contract lawyer/corporate lawyer who would look into every necessary aspect before drafting a Shareholder agreement. We at VSK & CO ADVOCATES AND LEGAL CONSULTANTS draught commercial, corporate, and IPR agreements from scratch to make sure that you do not face any legal consequences later.