Shareholder Agreement

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Shareholder Agreement

A Brief Introduction About the Agreement: What Is a Shareholder Agreement

An agreement among some or all of the shareholders of a company is known as a Shareholder Agreement. It highlights their rights and obligations and protects the interests of both the minority and majority shareholders. Its contents depend on the situation of each company but generally include clauses on the voting rights of the investors, rights in the event of the sale of the company, transfer of shares agreement, and confidentiality. The Articles of Association(AOA) of the company generally include these clauses; however, they may not be as detailed.

The agreement while being fair and just to all parties can protect the minority shareholders from suppression and majority shareholders from losing their stake in the company.

Who Are the Shareholders of a Company?

A shareholder is anyone who legally owns one or more shares of any private or public company. For the purpose of this agreement, we will consider only the shareholders holding equity shares and not preference shares. Equity shares give their holders an ownership right in the company.

What Are the Ownership Rights the Shareholders Have?

With the virtue of being a shareholder, the primary ownership rights granted to them are as follows:

  • Voting rights in important matters of the company
  • Right to transfer of shares
  • Right to earn dividends and shareholder distributions
  • Right to take legal action in case of wrongful actions

Who Takes the Shareholder Agreement: People Involved

As discussed earlier, the SHA is an agreement between some or all members of a company. In some cases, the company may also be a party to the agreement since it concerns the daily operations and events of the company.

Purpose of a Shareholder Agreement: Why Do You Need It?

In the case of private companies, where there is a restriction on the number of shareholders, and the directors are usually the shareholders, the agreement is important to help protect the minority holders.

The purpose of the agreement is mainly to:

  • Provide additional protection to the shareholders over the article of association of the company.
  • Reduce the possibility of disputes within the company
  • Provide measures for dispute resolutions

It is recommended to execute a shareholders’ agreement. However, there is no legal requirement for it.

Key Terms of Shareholder Agreement: Inclusions

The main inclusions in a shareholders’ agreement can be seen below:

  • Details of the parties involved
  • Total shareholding of the company or the paid-up capital
  • Rights and duties of the shareholders in terms of voting, appointment, and removal of directors, transfer of shares, etc.
  • Details on the day-to-day operations of the company
  • Valuation of the business and the shares
  • Confidentiality agreements
  • Conflict resolution measures

Drafting a Shareholder Agreement: Points to Consider While Preparing the Agreement

When writing a shareholders’ agreement, you need to keep the following in mind:

  • Ensure that all the concerned parties needs are met and that the agreement safeguards their interests
  • Plan for all future disputes and provide for ways to resolve the same. The situation within a company changes from time to time, and issues can come up. The agreement should provide for conflict resolutions and ensure that the business can run smoothly

Types of Shareholder Agreement

Shareholders’ agreements can be divided into the following two types based on the shareholding of the members:

  • Minority shareholders’ agreement – The minority shareholders, are members with less than 50% of the company’s holdings. They find themselves to generally be more vulnerable in the companies in situations where the management may act in the interest of the large shareholders. These agreements provide for the protection of their rights and prevent any abuse of power against them.
  • Majority shareholders’ agreement – The majority of shareholders, are members with more than 50% of the companies holdings. These agreements provide for the protection of the company’s confidential information and non compete agreements in the interest of the business. The majority of shareholders may also want to protect themselves in the event of a sale of the company and provide for shares being sold in a pre-defined proportion.

Negotiation Strategy

As discussed above, based on their shareholdings, different shareholders will have a different priority from the agreement. The parties need to find common ground and draft the agreement accordingly.

Benefits and Drawbacks of the Shareholder Agreement

As discussed in multiple clauses above, the benefits of the SHA are as follows:

  • Protects the shareholders of a company
  • It is a private document unlike the articles of association which are publicly available
  • Provides terms for conflict resolutions.

The drawbacks of the agreement are as follows:

  • Setting forth detailed guidelines for the operations of the company and shareholder relationships leaves less room for flexibility for the company to run smoothly
  • It is harder to make amendments as it requires a 100% agreement whereas in the case of the articles of association a 75% agreement would do.

What Happens in Case of Violation?

In case of any violation or breach of the terms of the agreement, the involved parties can approach the court. They would be well within their rights provided that they abide by the terms of the agreement, the articles and memorandum of association of the company and the company law.

The shareholders’ agreement is an important document for any company as it provides a predetermined set of rules and regulations to be followed and provides for conflict resolutions.

While drafting the SHA, one must very carefully consider the needs of all the parties involved as there is no particular framework set out for it and solely depends on the requirements of the company.

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