What is a Shareholders’ Agreement?
A shareholders’ agreement is an arrangement among a company’s shareholders that describes how the company should be operated and outlines shareholders’ rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.
The purpose of the agreement is to protect the interests of the shareholders; especially minority shareholders i.e the ones holding less than 50% of shares in the company.
What are the benefits of creating a shareholder Agreement?
- A shareholder’s Agreement clears the authority in India. It also distinguishes the standing of a shareowner, and the license you stock
- A shareholder’s Agreement enables the correct conditions for constructing amendments to the company’s constitution. \
- Furthermore, a shareholder’s Agreement states the role and protects the rights of minority shareholders in a company.
- A minority shareholder will have access to purchasing shares from other shareholders just like a majority shareholder.
- Additionally, a shareholder’s Agreement will ensure that shareholders have a legal association with the company, including setting or modifying rules and guidelines.
- Shareholder’s Agreement safeguards the position or roles of shareholders.
Contents of a Shareholders’ Agreement India
Shareholder’s agreement generally consists of the provisions related to the shareholder’s rights with respect to the following matters:
- Rights of a shareholder
- As a shareholder, he has certain rights with respect to the company such as 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 and Right to inspect the registers and books of the company
- Regulations related to the transfer and sale of shares of the company
- Incorporation of Certain rules to protect the shareholders’ interest with regards to the transfer and sale of company shares.
- Financial needs of the company
- Shareholders can proceed to obtain the most feasible source of funding, whenever they think it to be beneficial for the company.
- Requirements with respect to a quorum
- A quorum refers to the minimum number of members required for a meeting to be considered as a valid meeting. You must mention the requirements with respect to a quorum.
- Valuation methods for the shares of the company
- Considering the frequent fluctuations in the market, proper valuation of company shares is extremely important for the fortunes of the company.
- The manner in which the company will be run
- There must be specific procedures and policies in place for free-flowing and smooth operations.
- Liabilities of a shareholder including Minority Shareholders
- Furthermore, shareholders are liable only to the extent of the unpaid amount of share capital with regard to the share held by them or the amount guaranteed by him. The rights of the minority shareholders are also given importance.
Pointers while drafting a Shareholders’ Agreement
- One needs to understand the need of a shareholders’ agreement including why is it necessary to create a balance between shareholders’ interests and company interests.
- Do not make the terms ambiguous, but keep it precise which limits the terms’ interpretation. Wide interpretations cause problems in the long run.
- Clearly, list out the rights and obligations of both parties – i.e. shareholders and the company.
- Keep in mind that there is a high possibility that a shareholder might want to leave – clauses regarding such process should be clearly laid out.
- Define dispute resolution clauses clearly such as mode of dispute resolution, place of such dispute resolution, powers and duties etc.
- Restrictions on transfer of shares should be clearly defined and the process for the same should be laid out.
FAQs
It addresses many key issues that the company may face in the future and brings clarity to what, when and how the shareholders must act which will allow smooth management of the company.
The Shareholders agreement is an agreement between the shareholders in a private ltd company. It details how the governance, and what their relationship is to the company and to each other. The shareholders agreement is not the same as a partnership agreement, as a partnership has its own business structure with different rules and regulations. A partnership is made up of individuals.
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.
Hi @Aditya_s,
Company formation documents are the key pieces of documentation issued after the successful registration of a new limited company. You must retain these important documents, ideally at your registered office address, because you will need to refer to them throughout the lifetime of your company.