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Overview

A shareholders' agreement, also called a stockholders' agreement, is an arrangement among shareholders that describes how a company should be operated and outlines shareholders' rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.

The shareholders' agreement is intended to ensure that shareholders are treated fairly and their rights are protected. The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

A shareholders' agreement includes a date; often the number of shares issued; a capitalization table that outlines shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the event of a new issue); and details on payments in the event of a company sale.

Shareholder agreements differ from company bylaws. Bylaws work in conjunction with a company's articles of incorporation to form the legal backbone of the business and govern its operations. A shareholder agreement, on the other hand, is optional. This document is often by and for shareholders, outlining certain rights and obligations. It can be most helpful when a corporation has a small number of active shareholders.

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Checklist for Shareholders' Agreement

Stated below are some points which is included in Shareholders' Agreement:

  • Rights of a shareholder:
    1. Right to vote
    2. Right to appoint directors and the company auditor
    3. Right to ask for a general meeting
    4. Right to inspect the books & registers of the company
    5. Right to the financial statements of the company
  • Regulations related to the transfer and sale of shares of the company:
    Certain rules need to be incorporated in a shareholders agreement India to protect the shareholders' interest with regards to the transfer and sale of company shares. Such rules would ensure that such a sale or transfer happens only after receiving the mutual consent of the parties associated.
  • Financial requirements of the company:
    Shareholders can proceed to obtain the most feasible source of funding, whenever they think it to be beneficial for the company. The shareholder's agreement draft includes the procedure to obtain such finances.
  • Requirements of quorum:
    The shareholder's agreement will mention the requirements related to a quorum (the minimum number of members required to constitute a valid meeting).
  • Methods for Valuation of shares of the company:
    Considering the frequent fluctuations in the market, proper valuation of company shares is extremely important for the fortunes of the company. The valuation methods and approaches are laid down precisely in the shareholder's agreement India.
  • Guidelines to run the company:
    The shareholder's agreement would contain the guidelines, policies, and procedures to ensure the smooth running of the company on a day-to-day basis.
  • Shareholder Liabilities:
    Shareholders only have limited liability with the company and are not liable directly for the activities of the company. The liabilities of the shareholders are defined clearly in the agreement.
  • Protection of minority shareholders:
    The rights of the minority shareholders, as per provisions of the Companies Act, 2013, are laid down in the shareholder's agreement. The agreement will ensure the protection of the minority shareholders in the event of mismanagement, oppression, or Piggy Backing (sale of shares by majority shareholders).

Benefits of Shareholders' Agreement

Stated below are some benefits of Shareholders' Agreement:

  • It Clears Authority:
    A shareholder's agreement India clears the authority and standing of a shareowner and the license you stock as the issuer of such shares by characterizing the power and risks for all. Additionally, it mediates as a governor of the interaction between small and big shareholders.
  • Ease In Making Amendments:
    A shareholder's agreement facilitates the perfect conditions for making amendments to the company constitution. It is suitable for small-scale and medium businesses that do not wish to officially change the entire constitution whenever minute changes are required to be made.

Advantages of Shareholders' Agreement

  • Protects Small Shareholders:
    A comapny may have majority and minority shareholders. A shareholders' agreement state the role and protects the rights of minority shareholders, within a company.
  • Purchase of shares:
    A minority shareholder will have access to purchasing shares from other shareholders, just like a mojority shareholder.
  • Gaining control:
    A shareholder's agreement will ensure that shareholders will have legal association with the company, including setting or modifying rules and guidelines.
  • Protects Position:
    Shareholders' agreement ensures the position or roles of shareholders, within a company, is protected.
  • Shareholder restrictions:
    Restrictions on matters that can be decided by shareholders can be included in the agreement.
  • Ensures privacy:
    While the Articles of Association are made public, the terms of a shareholder's agreement is private.

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