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The most frequent and popular way to become a shareholder in a startup is to invest in the company at a predetermined valuation that is set using widely accepted commercial criteria. Yet, the Investor makes their investment in the company based mostly on the representations and warranties made by the company’s founders and promoters, who are responsible for its performance. Typically the promoters come up with the idea to start the company, and the investors come in later to invest money to scale the idea.
Investors and promoters are essential components for any organisation, whether it is an early-stage startup or an established corporation. The active involvement of shareholders or investors in the corporation and its business practices has significantly increased over time.
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An investor is a person who chooses to invest money in a specific bank, business, or institution without guaranteeing a profit. Investors frequently use their capital for retirement, business, and even education. In the hopes of generating profitable financial returns in the future, some people also invest in mutual funds, stock exchanges, real estate, corporate stocks, etc.
Promoter is defined as any of the following individuals by Section 2(69) of the Companies Act of 2013[1]:
A promoter employs a variety of strategies to raise capital for a company. Stock promoters frequently use traditional stocks and bonds, but they may also encourage partnership opportunities through limited liability or direct investing activities. The promoter may be free to choose their own incentives or be limited to using only certain offers.
It is important to remember that there are various categories of investment promoters while examining the definition of a promoter. The following are a few of the most typical promoter examples:
There are still disputes between investors and promoters nowadays. These have long been sources of worry for both investors and promoters. The shareholders of Signature Bank were the most recent to join the list. They filed a proposed class action lawsuit against the bank and three of its former senior executives, alleging that the bank had misled them about its sound financial position just three days before a state regulator took over.
Conflicts between Texas Pacific Group, Bain Capital, and the promoters of Lilliput Kidswear Ltd. in the past have been blamed on poor corporate governance and financial mismanagement. In the end, the issue prompted Lilliput to submit a request for corporate debt restructuring. It also significantly damaged the Lilliput brand’s reputation and caused several of its stores to close in 2012. Similar problems with financial mismanagement have surfaced in the Baring PE Asia-backed KS Oils and New Silk Road.
There are some complaints on the side of promoters, which leads to a big dispute between the investors and promoters.
There are many, but the following are the main ones:
Lack of sufficient due diligence by investors, competition between investors and promoters for control of the investee company, and a lack of emphasis on promoters’ corporate governance are contributing factors to these disputes. So, before making an investment in the company, investors must:
The steps mentioned above will lessen the likelihood of a dispute between the parties while also protecting their investment in the investee company.
Investors must also arrange their exit strategy at the time of the actual investment.
Popular exit strategies include:
The investee company and its promoters must also carefully select the investor. The process should include other significant considerations in addition to financial values, such as the investor’s contacts, brand image, mentoring, and other variables. The promoters will also need to make decisions regarding the level of control they are willing to give the investors, board seat reservations for investors, veto rights, liability limitations, non-compete and non-solicitation agreements, etc.
The partnership principle is expanded upon in business ventures. For the investors to become confident in the project, the promoters must routinely provide financial and other business updates to the investors. The investors should be included in the company’s important business decisions. These simple actions can significantly reduce the likelihood of disagreements and disputes arising between investors and promoters.
Given the impending threat of the Covid pandemic followed by the global financial crisis, investors and promoters must make wise business decisions after carefully considering all potential outcomes and carrying out adequate due diligence. Both parties to the deal would do well to get competent legal advice and assistance with preparing the transactional agreements and completing due diligence.
There are practical steps that can be taken to try and reduce the likelihood of conflicts, and even if those prove impractical or ineffective, directors may still be able to prevent litigation or disruptive investor action.
It is usually advisable for an investor to have the ability to perform financial audits on the firm and its current financial situation. Investors who purchase a sizeable part of the company’s share should emphasise their right to assent to important decisions.
Every investor conflict should be resolved in general meetings. However, other solutions might need to be considered if problems are not successfully solved during these meetings. Parties should review the investor’s agreement and the company’s articles of association to determine the options accessible to investors. Moreover, other possibilities for resolving investors’ and promoters conflicts include the ones listed below:
Everyone concerned wants conflicts to be resolved quickly and effectively; doing so calls for a properly thought-out plan that considers all relevant conditions, risks, facts, and repercussions that might affect the outcome. Before choosing one technique of resolution over another, dispute resolution options must be carefully analysed.
When a dispute arises despite the best efforts of all parties, it should, whenever feasible, be handled through mediation to allow the parties to participate in coming up with a solution that they can both agree on. Other options for resolving the concerns include arbitration and litigation. However, each of these depends on the decision made by the arbitrator or court in each case. The company’s best interests should always come first for all investors and shareholders, and they should be able to cooperate to find the most workable solutions.
Also Read:A Brief Understanding on Investment in Equity Shares & Tax planningRegistration of Indian Insurance Companies: Compliance Requirements
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
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