Blog Details

Author - Associate Sanjani Shah

It is easy to presume that nothing can go wrong when setting up a business with family or friends. You might presume that as you have faith in one another, no need to have shareholders' agreements. Asking for shareholders' agreement will feature like you do not have trust or respect for your new affiliation.

Optimistically nothing will go wrong, but even family persons and best buddies get into conflict, if the worst should happen, you could end up losing everything, or might loosing of relationship or friendship. While the company’s articles of association and company law will assist comparatively, but entirely well-drafted and studied shareholders' agreement can help as protection and shield against these types of developments.

A shareholders’ agreement is a concurrence entered into between all or some of the shareholders in an entity. It modulates the relationship between the shareholders, the administrator of the company, the right of possession of the shares and safeguarding of the shareholders. They also guide the way in which the company is run. It may be common to combine the use of shareholders’ agreements with a circumstantially drafted set of articles of association for the company.

Shareholders’ agreements are frequently shielding and protecting shareholders since they can assist if things go wrong amongst other things. An agreement can furnish for many possibilities including the financing of the company, the management of the company, the dividend policy, valuation of shares, followed the procedure for transfer of shares, deadlock situation.

The nonexistence of a shareholders’ agreement lead to open up the possible disputes and disagreements among the shareholders. Shareholders’ agreements have the allocation for pre-empt disagreements and demonstrated suitable ways for disputes to be addressed.

The shareholders’ agreement will have certain important and pragmatic rules relating to the company and the relationship between the shareholders. This can be advantageous to both minority and majority shareholders. The highlights of agreements contain:

• Rights and duties of the shareholders.
• Modulate the sale of shares in the company.
• Illustrate how the company is going to be functioning.
• Provide a section of shielding interest of minority shareholders and the company.
• Describe the procedure of taking an important decision.
• In a public company where shareholders are separated from the board of directors, and consist of a number of holdings where no single shareholder or group of shareholders have control in such circumstances company law is usually applicable.

In such instance the shareholders brought in the directors, having certain expertise to manage the business of the company on their behalf. But this is not obligatory the case in private companies. Usually, in small private companies, there are not many shareholders, and shareholders are normally directors of the company. Here, where a shareholders’ agreement becomes advantageous since the minority shareholders, the majority shareholders, and those having possessions of equal shares want to secure and safeguard their rights, normally which are not covered in the articles of association of the company.

Particularly accessible person in a private company is a minority shareholder. This is partly because there will be not many shareholders in a private company. So control of the company will be in the hands of one or two persons. Shareholders, who are not satisfied as to the way a company is being run do, not have the option of selling shares as there is no market for the shares. The single-mindedness’ of control in one or two shareholders can lead to misuse of power, even where no single shareholder influence majority.

There are usually provisions that require definite matters to be approved by all the directors/shareholders before being modified, for exemplification, differing the salary of any directors, introducing or entering viable business contracts or initiate legal proceedings.

Shareholders’ agreement normally consists of the provisions connected to the right of shareholders’ with respect to the following:

1. Director’s appointment and removal: Shareholders’ agreements mention the rights of the shareholders for recommending the director of the company and the removal of directors of the company. Also, the legal minimum attendance of the board meeting is mentioned in the shareholders’ agreements.
2. Share’s sale and transfer: It consists of the procedure of transferring shares among the shareholders’ and also the sale of share outsiders.
3. Right of vote: For passing the resolutions in the board meetings and other meetings by the process of voting is also cited in the agreements.
4. Permission and paid-up capital: The shareholders’ agreement mentioned specifically authorized and paid-up capital of the company. It also states the policy governing the need for shareholders’ approval in case of the new publication of shares by the company.
5. Appointment and removal of Auditors: It enrolls the present auditors of the company and the need for shareholders’ sanction for the change/removal of auditors.
6. Banking arrangements and financing company: Taking major bank loans or other sources of finance, shareholders’ agreement lays down the procedure and policy for its approval.
7. Confidentiality: Shareholders are not permitted to reveal the company secrets or any confidential information associated with the company to strangers or outsiders as per this clause.

The shareholders’ agreement fundamentally constitutes the regulation for the overall conduct of the company and the right of shareholders in such conduct of the company. The shareholders’ agreements minimize the chance of disagreements among the shareholders by specifically explaining their roles and rights in the company. The shareholders, minority and majority get benefits and protection from these agreements.