Shareholders Agreement
A shareholder agreement is one of the most important documents for a business with shareholders. A shareholder agreement is a formal contract that sets the rules for the company and makes sure that everyone is treated fairly. A shareholder agreement talks about a lot of important things:
- The shareholder’s rights and obligations.
- There are rights and obligations when selling the company’s shares.
- The company’s management has rights and obligations.
- The investor’s rights and obligations.
This article decodes the format of a shareholder agreement to comprehend the significance of its multiple elements.
Parties in a Shareholder Agreement
The company, investors, and current shareholders establish a shareholder agreement. The identification of the parties to the agreement establishes the recitals that provide reasons for the shareholder agreement. The following clauses in this section are considered important:
- Both shareholders agreed to become Equity Partners by investing in the company’s shares, if they execute a shareholder agreement under the terms of this agreement.
- The Companies Act, 2013 (hereinafter referred to as the “Company”) established the company, and the shareholders have agreed to its joint management.
Authorized & Paid-Up Capital
The shareholder agreement will define the authorized capital of the company, the amount of shares the investor will purchase, and the paid-up share capital of the company. Moreover, the company may incorporate a clause mandating the written consent of both shareholders before issuing any additional capital.
It is decided that no more capital will be given out without the agreement of both Shareholders. Both Shareholders will determine any additional investment, unless otherwise agreed upon in writing.
Auditors of the Company
The shareholder agreement also mentions the company’s auditors and includes a clause prohibiting their modification without the prior written consent of both shareholders and directors.
Board of Directors
The Company’s Board of Directors is also defined, as are the rights of each shareholder to appoint directors. Additionally, the Company specifies the Quorum for a Board Meeting, even if it deviates from the Articles of Association.
“Shareholder A shall have the right to nominate two (2) additional directors onto the Board, and Shareholder B shall have the right to nominate three or more additional directors on the Board.” By giving written notice to the opposite side, any side may remove a member from the Board at any time and designate a new member in their place.
Business Activity
The shareholder agreement typically defines the proposed business activity in which the shareholders have united and invested. The agreement also contains a clause that enables the company to modify its business activities with the approval of all shareholders.
The company is still involved in food delivery, either directly or through other agencies, and may engage in any other business as determined by the shareholders from time to time. However, the company will never engage in any other business activity without the approval of both shareholders.
Voting
The shareholder agreement also specifies the process for voting on resolutions as well as significant items that necessitate the prior written consent of the shareholders and/or Directors and a Resolution passed by the Board of Directors.
Without the prior written consent of the Shareholders and/or Directors, neither the Board nor the Shareholders may pass a resolution or decide on any of the following issues.
- The company has made changes to the scope and nature of its business activity.
- The company is borrowing money that exceeds Rs. XXXX.
- Declaring dividends.”
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Transfer or Sale of Shares
A shareholder agreement typically contains a clear definition of the areas that pertain to the transfer or sale of company shares. A measure that requires the other party to first make an offer to sell the company’s shares to another shareholder is often included. The sale can only proceed if the latter declines.
The shareholders must first propose the shares in writing to the other shareholder if either shareholder wishes to sell all or a portion of their shares in the Company. If the other party does not accept the offer within XX days, the first party will be at liberty to sell the shares to any other individual of their choosing at the same price and under the same terms and conditions as those stipulated in its initial offer to the other party.
Arbitration
Most shareholder agreements typically include a clause for arbitration to ensure the swift resolution of any disputes. A shareholder agreement may include the following clause to initiate arbitration:
Any dispute or difference between the parties that arises out of or relates to the construction, meaning, scope, operation, or effect of this agreement, or the validity or breach thereof, shall be resolved through arbitration in accordance with the Rules of International Commercial Arbitration of the Indian Council of Arbitration. The parties shall be bound by the award that is rendered in accordance with those regulations.
Summary
A shareholder agreement is an essential document for any company that has shareholders. It delineates the rights and responsibilities of shareholders, management, and investors in order to guarantee fair treatment. It encompasses critical components, including the composition and authority of the Board of Directors, business activities, voting procedures, share transfer or sale protocols, arbitration processes, and party identification, as well as authorized and paid-up capital, auditor responsibilities, and arbitration processes. Each of these elements significantly influences the governance structure, decision-making authority, and conflict resolution mechanisms within the company, safeguarding the interests of all parties involved.
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FAQ’s
A shareholder agreement is a formal document that outlines the rules, obligations, and rights of investors, management, and shareholders in a firm.
The parties are usually the investors, the company, and the current shareholders.
It outlines the company’s authorized capital, the shares that investors purchased, and any requirements for issuing more capital.
The agreement outlines the shareholders’ right to nominate board members, the minimum number of individuals required to attend a meeting before the board makes decisions, and the procedures for evicting or electing directors.
It outlines the business’s current activities and outlines how shareholders can approve changes to them.
The agreement explains how to vote on important motions and makes it clear that big decisions need the approval of shareholders and/or directors.
The agreement spells out how to vote on important motions and clarifies that shareholders and directors must agree to big choices.
The agreement specifies the governing rules and the binding nature of arbitration decisions.