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While setting up your business with others, if you seek more protection and confidence about your relationship with them in the future, then you must look to first draft a Shareholder’s Agreement (SHA). It is one of those indispensable legal documents that shall protect your business and your investment in the company. Some people will have it easy thinking nothing will go downwards in the future and may ignore creating the agreement; however, one must be prepared for the worst. If some unforeseen contingencies arise in the future, one may end up with absolutely nothing. Therefore a well-drafted Shareholder’s Agreement should be the priority lest shareholders complain later. This article sheds light on various aspects relating to the Shareholder’s Agreement, including its importance and key contents.
As the name itself suggests, a Shareholder’s Agreement (SHA) is an agreement between the shareholders of a company. It describes their rights and obligations. The agreement can be between a particular class of shareholders or between all of them. It is a legal document that lays down the regulations upon which the company shall run. The agreement clearly defines the roles and responsibilities of the key players in a company. It lays down the foundation on which a company is built.
The SHA document sets out the details of a corporation in order to avoid any confusion in the future with respect to the rights of the shareholders. The main motive of the SHA is to safeguard the shareholder’s investment in the company and to institute a fair relationship amongst the shareholders. A detailed SHA contains the particulars about the ways of managing the business, handling disputes between the shareholders and responsibilities, and the advantages of each shareholder in the company.
This agreement comes in handy to resolve any dispute between the shareholders and the company. One cannot take things for granted, and anything may go wrong at any time; therefore, owing to such uncertainty, the Shareholder’s Agreement helps not only in resolving the disputes but also facilitates a healthy relationship between the shareholders and the company. The agreement safeguards the investment made by the shareholders, and it enumerates the terms and regulations for the shareholders and any other party in the company.
The SHA must be regulated owing to the fact that all shareholders are not the same. It must be drafted knowing that every person is different, and thus their opinions on various matters would also be different. They may agree to some opinion or may not. It would be better if the agreement is put in place when the company is formed. This may lead to an understanding of the shareholder’s expectations of the business.
Having an SHA also helps in ensuring confidentiality in a business. The shareholder’s during the course of the business may have access to certain confidential information about the company. In order to ensure that such information is kept by the shareholders, an SHA with confidentiality provisions is the best way. The importance of the agreement can also be deduced by the protection that it grants to the investors who take a risk on their investment and to the minority shareholders by ensuring that certain decisions need the assent of all the shareholders. If a company doesn’t have an SHA, then the minority shareholders may have a little say in the functioning of the company. The control of the company may rest with one or two shareholders in that event. One being a minority shareholder and having an SHA will ensure that he or she has the right to say in the important decision of the company.
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Generally, a Shareholder’s Agreement (SHA) can be set up at the beginning itself; that is when the company is formed and issues its first share. It can help to know that there is an element of common understanding between the shareholders about the expectations of the business. It can be expected that at that point, the shareholders may have a similar mind regarding what they offer and receive from the company.
There may raise a situation where the investors may defer the discussion of SHA to complete setting up the business with an intention to discuss on a later date. However, the appropriate opportunity may not come due to other works related to the company, and even if they may discuss it later, it could happen that their expectations towards the business may have changed, thus making it difficult to agree with the terms of the agreement.
The opinion regarding the best time to set up the SHA may differ from person to person. Some would think that there is no so-called specific time and that it can be set up during the improvement of the company.
A Shareholder’s Agreement will directly affect the decisions made in a company; that’s why it must be well drafted. The management must work under the set guidelines of the SHA. There are some key inclusions that must be incorporated in an SHA. The key inclusions in the agreement are specified below.
By restricting who can purchase or inherit shares in a company, shareholders can be protected. You don’t want a situation where a new outside shareholder came in and purchased shares and created issues with existing shareholders.
The procedure followed for preparing an SHA is specified below.
The following points must be considered whilst drafting a Shareholder’s Agreement (SHA):
With a view to enhance the functioning of the company and to provide structure to the relationship between the shareholders and the company, the concept of Shareholder’s Agreement was introduced. It is a fundamental foundation upon which the business is set up, and protection that it provides to the interests of everyone involved is really the icing on the cake. However, it must be well-drafted else if it’s drafted poorly; it may lead to disputes that may cause the relationship between the shareholders and the company to be affected, thereby causing a significant loss in the business. Hence, the balance between the interests of shareholders and the company’s interests must be maintained while drafting such a critical agreement.