Shareholder’s Agreement

A shareholder is someone who invests money into the company. In exchange for his money, he is given a certain number of shares in the company. These shares entitle him to become one of the owners of the company and empowers a shareholder with the right to vote on certain matters related to the company.

What is a Shareholder’s Agreement?

A shareholder’s agreement is a contract between the company and its shareholders. It outlines the rights, obligations of the shareholders and provisions related to the management and the authorities of the company. The purpose of the agreement is to protect the interests of the shareholders; especially minority shareholders i.e the ones holding less than 50% of shares in the company.  

Contents of a Shareholders’ Agreement

Shareholder’s agreement generally consists of the provisions related to the shareholder’s rights with respect to the following matters:

Rights of a shareholder

As a shareholder, a person is entitled to certain rights with respect to the company. Some of them are:-

• Right to vote
• Right to call for a General Meeting
• Right to appoint directors
• Right to appoint the company auditor
• Right to copies of the financial statements of the company
• Right to inspect the registers and books of the company

Regulations with regard to sale and transfer of the share of the company

When it comes to the issue of transfer of shares, to protect the interest of the shareholders,there are certain rules put in place so as to ensure that such transfer happens only upon receiving the consent of the parties involved.

Financial needs of the company

As the shareholders are given copies of the financial statements, they are able to track the progress and the needs of the company. In the event where the shareholders find the need for an influx of funds which they think will be beneficial to the growth of the company, they will then discuss the most lucrative source of funding and then proceed towards obtaining it. The procedure for obtaining such finances are laid down in the Shareholders Agreement.

Requirements with respect to a quorum

A quorum refers to the minimum number of members required for a meeting to be considered as a valid meeting. The requirements with respect to a quorum will be clearly mentioned in the Shareholders’ Agreement.

Valuation methods for the shares of the company

As the market is prone to constant fluctuation, the value of the company shares varies too. However, in order to aid in the proper preparation of the financial statements, the method of valuing the company’s shares also plays a significant part and has a material impact on the financial statements. The methods of valuation include:-

• Assets Approach
• Income Approach
• Market Approach

The manner in which the company will be run

In order for there to be smooth and free-flowing operations, there must be certain policies and procedures set in place. The Shareholders’ Agreement contains the guidelines with respect to how the company will be run on a day to day basis so as to ensure consistent and uninhibited workflow.

Liabilities of a shareholder

• Shareholders are not liable for the acts of the company
• Shareholders are held liable only to the extent of the unpaid amount of share capital with regard to the share held by them
• Where it is a company limited by guarantee, the shareholder is liable only to the extent of the amount guaranteed by him

The reason behind the limited liability of the shareholders boils down to the fact that the company is a separate legal entity, hence separate from the shareholders.

Protection of minority shareholders

Minority shareholders are those who do not enjoy much in terms of powers when it comes to the management of the company. Since the introduction of the Companies Act, 2013, the rights of the minority shareholders have been given importance. 

• Right to apply to the Board in case of oppression or mismanagement
• Right to institute a class action suit against the company and the auditors
• The requirement to appoint Small Shareholder Director
• Where the majority of shareholders sell their shares, then the minority right must also be included. This concept is termed as Piggy Backing.

Pointers while drafting a Shareholders’ Agreement

• It is imperative to understand the purpose behind the Shareholders’ Agreement, the necessity to create a balance of interests
• The terms of the agreement need to be clearly defined so as to avoid any further confusion
• The rights, duties and obligations of the company and shareholders must be specified in a concise manner
• The agreement must be airtight bearing in mind the mutual benefit of both the company and the shareholders
• The policies, procedures and guidelines set out in the agreement must be brief and coherent
• All matters set out in the agreement must be provided for in accordance with the relevant laws in place

Conclusion

The Shareholders Agreement was introduced with a view to enhance the operations related to the functioning of the company, and provide clarity and structure with regard to the relationship between the company and its shareholders at any given point in time. This helps in quicker resolution of disputes and leads to the undeterred and smooth functioning of the company and its operations.