Blog Details

Author - Advocate Sudipto Sircar and Associate Runa Jasia

Equity can be defined as a difference between the value of the assets and the value of the liabilities of something that is owned by an individual. For example, if an individual owns a mobile phone of INR 25,000, but owes INR 10,000 on loan against that mobile phone, then the mobile phone represents INR 15,000 of equity. 

Stakes represent the percentage of its stock that an individual one.

A shareholder’s equity is the difference between the total assets and total liabilities. Total assets value is the addition of liabilities and shareholder equity. The total asset of a company can be determined through the balance sheet of a company for a particular time period.

After subtracting all the debts related to an asset what remains can be called as equity of that asset. A stock in a private company is called private equity. Equity plays a vital role in a company because when a company falls out or goes bankrupt, then equity can be defined as the amount of money remaining in a company after repaying all the debts to its creditors. This is known as ownership equity. 

Shareholder’s Agreement

A stockholder or shareholder is a person or a company who owns at least one percent of the share of company’s stock or share in public or a private company. 

A shareholders’ agreement is made between the shareholders of a company that define and determine how the company will work, and it covers the roles, responsibilities, rights, obligations, privileges, and protections. It creates a legal and binding relationship between the shareholders and outlines the structure of a company. This agreement also includes information about the management of the company and other details. It’s clear from this agreement regarding what decision one can make for the company and what can’t be done. It is not compulsory but to protect the company from further conflicts between people the shareholders of a company; it is an intelligible decision to make

This is a private agreement and a confidential one because of what it contains.  Generally, a shareholders agreement contains:

•    Name of the shareholder.

•    The proportion of shareholders.

•    Classes/Categories of each shareholder (major, minority and founder shareholders)

•    Roles and Responsibilities.

•    Rules for transferring of shares in some dispute event.

•    Rules for stopping the transfer of shares by the board of directors

•    Issues of the shares in the new market to the existing shareholders?

•    Voting powers

•    Dividend policies. 

•    Property assignments.

•    Required dates

•    Pre-emptive rights for current shareholders about how can they purchase shares further.  

•   Important signature by both the parties/person on the agreement of all the terms mentioned in this agreement. 

If any one of the shareholders wants to forego the rights to the company, they can do so by following the provisions detailed in the agreement.

A Shareholder may get terminated if they have breached the agreement or if there is any breach with regards to the signed agreement. If so found, they may be terminated from the company. They may be some clauses for the remedy of this kind of situation depending on the clauses in the agreement.

A shareholder may be terminated, or they can end their agreement by mutual agreement. This is the situation when all the current shareholders no longer want to comply with the shareholders’ agreement in the company because of a multitude of reasons.

There can be various factors that play a role of ending of an agreement. The agreement allows the majority shareholder to realize their investment at any time and price that they feel is appropriate (payments will be fair for all the shareholders, including the minority shareholders). The majority shareholders have a definite advantage when they want to sell their shares over the minority shareholder.

As a startup founder or entrepreneur, it is vital to have one’s legal foundation airtight before expanding or investing into the venture further. Legal security ensures that growth shall not be hampered with due to any legal hassles.