Shareholders Agreement

Things to note before accepting a drafted Shareholders Agreement

To own entitlement in a company, there must be an existence of some draft or contract. A shareholder before investing in a company looks for all the pros and cons of the association and seeks for the policies being followed in the company through the contract it presents. An annexure placed before individuals or entities to join the company as legal shareholders is a Shareholders Agreement.

There is always a dual-side ambiguity:–

  • the company which is for deciding  the terms to be placed for the shareholders in the Shareholders Agreement and
  • For the shareholders to analyze what terms in the agreement to consider for their individuality in the company and what exceptional rights will they receive when they opt to accept that shareholders agreement.

The post below places some essential points which should never be ignored by any Company while framing or accepting a draft of the Shareholders Agreement.

Shareholders Agreement

A contract made by a company with its shareholders, through drafting a document including in it the clauses of rights, duties, responsibilities, authorities, liabilities, and ownership of shareholders in the company. The agreement is a binding contract between the shareholders and the company to place clarity in relations and provisions for resolution of disputes held between both.

However, there is no legal requirement or provision for the formation of a Shareholder’s agreement, but it is always beneficial to have one in the company records as it places a limit on the excessive use of power and rights both by the company and its shares held on.

Points to Remember

It’s never too late to make the required changes in a contract that can benefit.

1 ) Avoid ambiguity: The importance of a Shareholder agreement should never be ignored. It should be built and be built with crisp and clear provisions on all matters. In no matter, any provision of the agreement is left in any ambiguity. This will put in nothing more but the matter into long litigations. It is advisable to have a legal professional in assistance while preparing/drafting the Shareholders Agreement.

2) Pass on shares at demise: New owner in the company brings in new opportunities and new possibilities. Upon the death or legal disability of any shareholder, clause requiring mandatory open purchase or sale of his shareholding should be included respecting the rights of the other shareholders in existence. The clause should be made so clear that it does not put the business of the company to the risk of contemplating for the disposal of shares.

3) Define the capacity of disability: 

For disability insurance policy placed in the agreement, defining situations reflecting disability should be made clear in respect of both physical and mental incapacity putting no ambiguity. The clause in the agreement at prior concern should also be inclusive of a sufficient waiting period for deciding for the extent of incapacity.

4 ) Acknowledge Policy Ownership Rightly:

It is not so ideal to place a company in operation in any clause ‘a claimant of any life insurance policy’. As owned assets determine the flow of business to creditors and bring in capital gain exemptions. A life insurance policy owned in the name of the company does not seem fit in the list of owned assets with no benefit over the capital gain exemption.

5 ) To bring in the position of Unanimous Consent:  All business decisions require the consent of company owners. There might be no issue until all decisions are made without any opposition. Without a proper dispute resolution process placed in the Shareholders Agreement, a majority of decisions will be put to bin each time disagreements occur this will stun the growth of business and business owners will not be able to address important issues timely.

6 ) Think for drag alone right:  Investor rights are important and to be most respected. But imagining a case, where some investors think a deal to be the most profit-making when the business gets sold out to some third party, but a shareholder or any founder member holding majority right restricts such decision and the opportunity for other members could be squared out. So, there should be a drag-alone right clause in a Shareholders Agreement, posing a right to the majority to drag alone to a profit-making decision.

  7 ) Proclamation for delays in disagreements: Pre-planning for situations causing failures can help a company to move away from destabilization. It is the most notable thing that with each positive decision some negative actions come around. So to keep up only with positive decisions, a clause defining for an appropriate timeline for reviewing disclaimers should be entered into the Shareholders Agreement.

So, it is always advisable to get an exclusive Shareholders Agreement prepared from a  legal professional than just relying on some pre-drafted ones but it is really important to note that in any event of the contradiction between the shareholder’s agreement and  Companies Act. The Companies Act provisions shall be in an overpowering capacity.

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