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A shareholder agreement outlines how a company is to be operated, the rights and obligations afforded to the shareholders and the relationship between the company and the shareholders. It is similar to a partnership agreement, which is an arrangement between the various partners in a business.
The purpose of a shareholder agreement is to ensure that shareholders are protected and treated fairly, and it allows them to make decisions on the third parties who may become shareholders in the future. Although it is designed to protect all shareholders, a shareholder agreement is more important to minority shareholders since it outlines the majority shareholders’ obligation to protect minority shareholders against abuse and give them a voice when key decisions are made.
The purpose of a shareholder agreement is to ensure that shareholders are protected and treated fairly, and it allows them to make decisions on the third parties who may become shareholders in the future. Although it is designed to protect all shareholders, a shareholder agreement is more important to minority shareholders since it outlines the majority shareholders’ obligation to protect minority shareholders against abuse and give them a voice when key decisions are made.
The contents of a shareholder agreement may vary across companies. Some of the contents of a shareholder agreement include:
The first section of a shareholder agreement identifies the business entity as one party that is different from its shareholders (another party).
The shareholder agreement describes the role of the board of directors in the company and the requirement that decisions of the board should be approved by the majority. It also states how frequently the board of directors should hold meetings and how directors are selected and replaced.
The shareholder agreement should set out issues that cannot be passed without getting the approval of all signatories, not just majority support. By creating a list of reserved matters, all shareholders are given the chance to vet certain transactions to determine if they are prejudicial to their investment.
Some of the commonly reserved matters include changing share capital, acquiring or disposing of certain assets, taking on new debt, paying dividends, and changing the articles of association and memorandum.
The shareholder agreement should include a requirement that shareholders are entitled to regular updates on the company’s performance through quarterly reports and annual reports. It should state the specific period when the reports should be sent out to shareholders. The agreement should also state when shareholder meetings will be held and the time, date, and venue of the meetings.
The shareholder agreement should record the corporation’s share capital at the date it was reported. Since changing share capital is one of the reserved matters, the directors are prohibited from issuing new shares or changing existing shares into a new share class without the signatories approving the changes.
The shareholder agreement also contains provisions relating to share transfer, such as preventing share transfer to unwanted parties, transferring shares to a new party, what happens if a director or shareholder dies, as well as drag and tag provisions.
The process of amending or terminating the shareholder agreement should be provided in the agreement. For example, the shareholder agreement may be terminated upon the dissolution of the company, based on a written agreement, or after the lapse of a specific number of years from the date of the agreement.
The following benefits can be enjoyed by the members agreeing:
Different Authority
There is the distinction of authority from the shareholder’s agreement. The respective rights and liabilities of the shareholders are underlined from the shareholder’s agreement. Moreover, the authority is well defined in the shareholder’s agreement.
Shareholders Agreement can be Amended
The shareholder’s agreement can be amended as per the requirement of the shareholders. However, for this, a special resolution has to be passed by the shareholders. The majority of the vote of the shareholders is taken for this form of resolution.
Protection to Minority
There is delineation between minority shareholders and the majority shareholders. Hence their respective rights and liabilities are separated.
Control over the Company
By having the shareholders agreement, there can be some form of control over the affairs of the company. The authority of the company can be established by the shareholders.
Provides Basic Restrictions
Specific forms of provisions related to the transfer of shares would be mentioned in the shareholder’s agreement. For the transfer of shares, there will also be a restriction on the transfer. Specific consent related to such transfers would also be dealt with in the shareholder’s agreement
A lot of effort and thought must be taken into consideration while drafting a shareholders agreement. The rights and respective liabilities must be understood clearly before drafting this form of agreement.
It is crucial to take the consultation or services of a lawyer before drafting a shareholders’ agreement. Provide us with information for drafting the shareholder’s agreement. After this, we will start with drafting the agreement.
If required we would contact you further for any information relating to the shareholder’s agreement. After preparing the first draft of the shareholder’s agreement, we will forward you the same. If there are any form of amendments that are required to be added then the same would be carried out.
Our main aim is to help those entrepreneurs and businessmen’s legal and regulatory requirements, and be a partner throughout the business lifecycle, offering support at every stage to ensure the business remains compliant and continually growing.
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