Home Tax & Compliance Shareholders Agreement Drafting

Shareholders Agreement Drafting

Shareholders are the investors, who are the real owners of the entity as it is built with the fund contributed by them. And the Shareholders Agreement is the agreement that is formed between the company and its shareholders. The agreement basically would state the rights and obligations which are held to each other or in various other scenarios by the company and the shareholders.

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Benefits of Shareholders Agreement

There are certain benefits or advantages provided by the Shareholders Agreement in India to both the company and the shareholder. Some of this would include:

It will serve in protecting the rights of the shareholders, especially the small shareholders, as it clearly states the role of the minority shareholders and also the terms for protecting them.
The Shareholders Agreement will also provide the minority shareholders with access to purchase the shares from the majority shareholders.
There is a gaining of control whereby it holds the shareholders have a legal association with the company along with the base for setting and modifying the rules and guidelines set for them.
It also provides clarity regarding the position of the shareholders within the company and also protects this through their rights and obligations stating.
The agreement also gives clarity to the shareholders about the restrictions placed on them.
It is a confidential and private agreement that provides the shareholders and the company the required privacy about the terms and conditions of their agreement.
It provides the base for resolving any dispute which has formed between the company and its shareholders or even between themselves.
It also protects the shareholder and the investment made by him or her in the company.

Provisions of the Shareholders Agreement in India

i. Some of the basic provisions which are included in the Shareholder’s Agreement would include:

The proportion in which the shareholding is held by each shareholder of the company.
The classes of shareholders (if any) present in the company include the majority, minority, and also founder shareholders.
The privilege, if any, that would be held by the existing shareholders when new shares are issued by the company.
The rights held by the company’s current shareholders in the wake of the issue of new shares by the company.
The rules are applicable to the shareholders when they are transferring the shares held by them, say the lock-in period or such other rules pertaining to the same.

ii. The Shareholder’s Agreement will also include provisions that require consent from the shareholders like, say:

Distribution of the dividend
Finalising the financial statements
Appointing a manager or other important personnel in the entity
When the company wants to amend documents like the AoA or the Article of Association
When a company decides to liquidate or dissolve or even file of bankruptcy
To take the decision regarding the merger, acquisition, or such other procedure.

iii. The next provision included would be related to resolving disputes because the shareholders are different people with different opinions, concepts, and aspirations. Due to this, we cannot always expect them to be in a cordial relationship and not have disputes regarding various elements or scenarios taking place in the company. At times, this dispute might also extend out of the company to a rival company, which also needs to be resolved.

Companies here would want their shareholders to resolve the issue out of court, not going for any arbitration, and for this, there should be some pre-written clauses or rules which would help in resolving these disputes in a cordial manner.

iv. The next would be the one with respect to any restrictions which are placed with respect to the transfer of the shares held by the shareholders. They shall be required to take written consent for this or even have to cross the lock-in period as established on them.

But it should be noted that this particular clause or provision shall not apply on the occasion of the deceasing of the shareholder, where the shares become automatically assigned to his legal heirs.

v. The right of first refusal, which is the right held by the shareholders and the company to restrict a shareholder from transferring his shares to a rival company or another person with whom the company is not in a good or cordial relation

For this, the shareholder who wants to transfer his shares should first have the right to match an offer that is received by him from another party.

vi. There will also be a clause with regard to the buy-out rights assigned to the shareholders where a shareholder is expelled from the company due to any of their acts or undesirable behavior where the rest of the shareholders can purchase his shares.

And it can also be exercised in case of death of a shareholder, filing of personal bankruptcy, or such other occasion.

Drafting of a Shareholders Agreement in India

The person drafting the Shareholders Agreement in India should know to balance the interest of the two parties involved which is the shareholder and the company.
The clauses and provisions written should be precise and clear putting at bay any requirement for wide and lengthy interpretations which will make it complicated.
The rights and obligations held by both parties should be reflected clearly, including the ones (if any required) different for various classes of shareholders in the company.
The agreement should include clauses required to be followed in the case of a shareholder who would want to leave the company.
The dispute resolution should be provided for being followed when there is an arising of the dispute.
There should also be properly written rules regarding any restriction of the transfer of the shares including any allied process for the same.

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