Sample Format of Pooling Agreement

Narendra Kumar

04 May, 2018

What is Pooling Agreement?

Pooling Agreement, Vote Pooling Agreement or Shareholder’s Agreement is legal document identifying the right of shareholders to pool their voting rights in a company together to either vote in a specific manner as decided before in time or to appoint a trustee who shall be transferred those voting rights.

Why create a Pooling Agreement?

With ownership of a stock, the shareholder receives few rights including the right to vote in respect of resolutions in a company. The pooling agreement is associated with combining such rights and using them together as a unit so as to maintain a majority in the voting process. In that manner, the influence of such shareholders increases, in matters of corporate decisions.

Accordingly, the rights may either be endowed in the hands of a single trustee who shall then cast a vote on behalf of all such shareholders together or the shareholders at an earlier stage decide the manner in which they shall vote in respect to the various strategies of the company or who shall control the business operations etc. The agreement does not change the ownership of the stock which remains with the shareholder; it is only the voting rights associated with it that is dealt with.

It is a contract to the effect that the shares held by the shareholders shall be voted as one single unit. The shareholders bind one another to vote as they mutually agree. Generally, pooling agreements are thought of in relation to control of private companies and smaller public companies.

 What is the enforceability of pooling agreement in India?

In a pooling agreement, each shareholder retains sole ownership of shares binding him only to vote for a specific person or in a certain way.

According to Section 44, Companies Act, 2013, ‘the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company;’

Free transferability of shares is the key characteristics of the corporations i.e.; shareholders can sell their shares at will. That implies that right to vote is a proprietary right and this makes Pooling Agreements force able. It is because only that the right to vote is being aided and effectuated by a contract.

The Supreme Court has established this principle regarding enforceability in various cases that a pooling agreement may be utilized in connection with the election of Directors and shareholders’ Resolutions where shareholders have a right to vote.

However, a pooling agreement cannot be used to supersede the statutory rights given to the Board of Directors to manage the company. The underlying reason being that the shareholders cannot achieve that by ‘pooling agreement’, what is prohibited to them when they are voting individually. Therefore, the power of shareholders to unite by forming a pool is not extended to contracts which place restrictions on the powers of Directors to manage the business. The reason being that the Directors are fiduciaries of the Company and the shareholders. It is their duty to do what they consider best in the interests of the Company. Thus, they can be a part of a pooling agreement or be restricted by them in any manner.

Thus, the pooling agreements, which are enforced, are concerning only the right to vote of the shareholders. The courts have not been granting specific performance of the agreements whereby the powers of the Directors stand checked.

Also, the Supreme Court has repeatedly held that a restriction which is not specified in the AOA is not binding on the company or the shareholders.

• Such agreements are enforceable under American Laws if the provisions are as per the prescribed laws which are different for States. It is for this reason that the American Courts have taken the view that the pooling agreements, which are based on fixed investment objectives, should not be made enforceable when such agreements come in the way of Directors’ decision to charter a course which favours interest and expansion of the company.

What are the features of a pooling agreement?

The pooling agreement must be

• In writing and unambiguous regarding its objective and scope.
• The agreement shall essentially mention following clauses:
  1. The details of the parties involved
  2. Names of the Authorized Representatives
  3. Date of execution
  4. Date from which the agreement is effective
  5. Terms of the pooling of rights
  6. Any restrictions to be mentioned
  7. Time period if any required to be set
  8. Signatures, Legal Name and Designation of the Authorized Representatives.