Guide to Shareholders Agreement

One of the main documents for a company having equity investors is the shareholders agreement. Shareholders agreement is a legal agreement between the shareholders of a company, which helps establish a fair relationship between the stakeholders and govern the operation of the company. Some of the key areas covered in a Shareholders Agreement are:

Rights and obligations of the shareholders.
Rights and obligations during sales of shares of the company.
Right and obligations of the Company Management.
Rights and obligations of the Investor.

In this article, we decode a Shareholders Agreement format to understand the various parts of a shareholder agreement and its importance.

Parties in a Shareholder Agreement

Shareholders agreement is entered into by the present shareholders of the company, investors and the company. Once, the parties of the shareholders agreement are defined. Recitals providing a reason for the Shareholders Agreement is defined. Some of the important clauses in this part include the following:

"Both the shareholders have agreed to become Equity Partners by investing in the shares of the Company subject to the condition that they shall enter into a Shareholders Agreement in terms of these presents" "The shareholders have agreed to jointly manage the company, incorporated under the Companies Act, 2013 (hereinafter referred to as the "Company")

Business Activity

Typically, the business activity proposed to be conducted by the Company, for which the shareholders have come together and invested is defined in the Shareholders Agreement. A clause to change the business activity of the company with the consent of all shareholders is also entered in the agreement.

"The company shall carry on the business of delivery of food, either by itself or through other agencies and may carry on any other business as may be decided by the Shareholders from time to time and shall ensure that no other business activity is undertaken by the Company at any time without the consent of both the Shareholders"

Authorised & Paid-Up Capital

The authorised capital of the company, the amount of shares to be purchased by the investor and the paid up share capital of the company will be defined in the Shareholders Agreement. Further, a clause might also be inserted to ensure that the company will not issue any further capital without the consent of both the shareholders in writing.

"It is hereby agreed that there shall be no further issue of capital without the consent of both the Shareholders hereto, and unless otherwise agreed upon in writing further investment shall be as mutually decided by both Shareholders."

Board of Directors

The Board of Directors of the Company is also defined along with the rights of each of the Shareholders to appoint Directors. Further, the Quorum for a meeting of the Board of the Company is also defined, if it is to be different from the Articles of Association of the Company.

"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. Both parties shall be entitled at any time to remove any of the representatives on the Board by written notice to the other party and to appoint another or other/s in their place."

Voting

The process for voting on resolutions is also defined in the Shareholders Agreement along with major items that require prior written consent of the shareholders and/or Directors and a Resolution passed by the Board of Directors.

"No resolution shall be passed or decision taken either by the Board or the Shareholders on any of the following matters, unless the prior written consent of the Shareholders and/or Directors is obtained n order for it to be validly passed or taken:

Changes to the scope and nature of business activity undertaken by the Company;

Borrowing money in excess of Rs.XXXX by the Company.

Declaring dividends."

Auditors of the Company

The Auditors of the Company are also mentioned in the Shareholders Agreement along with a clause to ensure that the Auditors of the Company cannot be changed without the prior written consent of both shareholders or the Directors.

Transfer or Sale of Shares

The areas concerning transfer or sale of shares of the company are usually well defined in a Shareholders Agreement. It is not uncommon for a clause to be inserted forcing the other party to first offer to sell the shares of the company to the other shareholder, and only on refusal to purchase be allowed to sell to another party.

"If either of the shareholders desire at any time to sell the whole or part of their shares of the Company, the shareholder shall first offer such shares in writing to the other shareholder. If the other party does not accept the offer within XX days, then the first party will be at liberty to sell the shares so offered to any other person of choice at the same price and on the same terms and conditions, as contained in its offer to the other Party hereto in the first instance."

Arbitration

A clause for arbitration is entered in most shareholders agreement to ensure speedy resolution of any disputes. The following clause can be included in a Shareholders Agreement to invoke arbitration.

“Any dispute or difference whatsoever arising between the parties out of or relating to the construction, meaning, scope, operation or effect of this agreement or the validity or the breach thereof shall be settled by arbitration in accordance with the Rules of International Commercial Arbitration of the Indian Council of Arbitration and the award made in pursuance thereof shall be binding on the parties.”

If you would like to create a shareholders agreement for your startup, you can visit IndiaFilings to consult with a Corporate Lawyer specialising in the drafting of Shareholders Agreement.

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Frequently Asked Questions

Common questions about Shareholders Agreement for Equity Investors in Companies.

A Shareholders Agreement is a legal contract between the shareholders of a company that establishes a fair relationship between the stakeholders and governs the operation of the company. It outlines the rights, obligations, and responsibilities of the shareholders, investors, and the company management.

The parties involved in a Shareholders Agreement typically include the current shareholders of the company, any investors or equity partners, and the company itself. The agreement defines the roles and responsibilities of each party.

Some of the key areas covered in a Shareholders Agreement include the rights and obligations of shareholders, investors, and the company management, the process for sale or transfer of shares, the composition and voting rights of the Board of Directors, the business activities of the company, the authorized and paid-up capital, and dispute resolution mechanisms.

A Shareholders Agreement is crucial for companies with multiple shareholders or equity investors as it clearly defines the roles, responsibilities, and rights of each party. It helps prevent misunderstandings and disputes among stakeholders by establishing a framework for the company's governance and operations.

No, the Shareholders Agreement typically includes a clause that requires the consent of all shareholders before the company can change its business activity or undertake any new business ventures.

The Shareholders Agreement outlines the process for appointing Directors to the company's Board, including the number of Directors each shareholder or investor can nominate. It also defines the quorum requirements for Board meetings and the voting process for resolutions.

Most Shareholders Agreements include clauses that govern the transfer or sale of shares. Typically, the agreement requires the selling shareholder to first offer their shares to the existing shareholders before offering them to a third party. This is known as the right of first refusal.

Shareholders Agreements often include an arbitration clause that outlines the process for resolving disputes between shareholders through arbitration, rather than going to court. This can help ensure a more efficient and cost-effective resolution of conflicts.

No, the Shareholders Agreement usually includes a clause that requires the prior written consent of all shareholders or Directors before the company can change its auditors.

Startups can consult with a corporate lawyer specializing in drafting Shareholders Agreements to create a tailored agreement that meets their specific needs and requirements. Online legal services like IndiaFilings can also provide guidance and templates for creating a Shareholders Agreement.