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Shareholder’s agreement

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.

    Purpose of Shareholder Agreement

    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.

    1. a company’s constitutional documents are normally available for public inspection, whereas the terms of a shareholders’ agreement, as a private law contract, are normally confidential between the parties.
    2. contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate.
    3. the shareholders might wish to provide for disputes to be resolved by arbitration, or in the courts of a foreign country (meaning a country other than the country in which the company is incorporated). In some countries, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents.
    4. greater flexibility; the shareholders may anticipate that the company’s business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution.
    5. corporate law in the relevant country may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders’ agreement.
    6. to provide formulas for share valuation to cut down on shareholders disputes over the value they can demand their shares either on voluntary or on compulsory transfers
    7. to restrict the activities of shareholders – preventing abuse of position and competing activities
    8. to provide mechanisms for removing minority shareholders which preserve the company as a going concern.

    What is Included in a Shareholder Agreement?

    The contents of a shareholder agreement may vary across companies. Some of the contents of a shareholder agreement include:

    1. Parties

    The first section of a shareholder agreement identifies the business entity as one party that is different from its shareholders (another party).

    1. Board of Directors and Board meetings

    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.

    1. Reserved Matters

    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.

    1. Shareholder Information and Meetings

    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.

    1. Share Capital and Share Transfers

    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.

    1. Amendment and Termination

    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.

    Benefits of Shareholders 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

    Procedure for Drafting Shareholders 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.

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