Sample Format of Shareholders Agreement

Narendra Kumar

03 Sep, 2020

What is Shareholders Agreement?

A shareholders‘ agreement is an agreement between the shareholders of the company. A purpose to create the Shareholders agreement is to protect the shareholders‘ investment in the company, to establish a fair, transparent relationship between the shareholders and the company in which the shares have been subscribed. The Shareholder agreement establishes the shareholders‘ rights and obligations and provides an element of protection for minority shareholders and the company.

Therefore an agreement is important to fully determine the basis for important decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

An agreement typically reserves few matters that specifically mentions the matters in which the decision will be taken either by special resolution that is 75% vote in favor or by ordinary resolution.

The main objective to draw the shareholders agreement is to put in place rights and rules which are in addition to the rules given in the Companies Act, 2013.

Why Is It Important To Draft A Shareholding Agreement?

1. Specifically mentions the rights and obligations of both the parties;
2. Decision-making rules (Majority/unanimously/unilaterally);
3. Dispute Resolution system;
4. Clear documenting of the exit strategy for shareholders;
5. Detail information about the frequency of shareholders meeting;
6. A framework of the Voting right to the shareholder and Veto power; if any
7. Clarity in rights like; information, inspection et;
8. A clear of Information on reserved matters ;
9. Clear documenting of pre-emptive rights.

Point Usually Covered In Shareholding Agreements

The main and most important element of a shareholding agreement that is to be mentioned is as follows:-

Definitions And Interpretations:

An agreement must begin with the definitions of the legal terms and their interpretation used in the agreement. Legal terms like; Act, agreement, affiliate, Angel investor^[1], Article, CCPS, Confidential Agreement, Encumbrance, Equity Shares, Reserved Matters, Transfer and many more. To avoid misconception and dispute between the parties it is mandated to define all the terms very clearly.

Effective Date:

The date when the agreement shall become effective and tenure of the agreement.

Operation And Constitution:

The company shall be capitalized managed and structured in accordance with this agreement comply with the MOA and AOA.

In the event any of the provisions of the agreement are inconsistent with the MOA and AOA, the terms of this agreement shall prevail, to the extent of the inconsistency.

Name, Place, And Business:

The name of the company and its date of incorporation.

Name of the investors and promoters who agree to jointly invest in the company.

Address of registered office of the company is situated at [Complete Address Of The Company].

A brief description of the business activity of the company and declaration that company shall not carry any other activity without the consent of the Board

Investment

Disclosure of the complete investment of the company:

It is hereby declared or agreed that no further issue shall be made by the company without the consent of the founders or promoters.

Roles And Responsibilities Of The Promoters And Founders

The promoter shall be responsible for the day to day working of the company.

Promoters will act in good faith and act to protect the interest of the shareholders of the company.

Promoters will be equal in stature and will hold executive posts in the company.

Both the Promoters and Directors will take independent decisions regarding the defined areas and will be bound by the terms of this agreement.

Voting

Matters on which the decision shall not be taken by the board unless the prior consent of members or shareholders is obtained by the resolution. Incident or affair of such nature are as follows:-

• Amendment or repeal of any provisions of, or adding any provision to, the company rules.
• Changing the nature or scope of the business of the company.
• Further, Increase in the capital of the company.
• Declaration of dividend
• Approving the annual budget of the company
• Transfer of shares.

Dispute Resolution

In an unlikely case of disagreement between the parties, the same shall be resolved by the mutual consent of the parties in a meeting of Board and Shareholder.

In case the meeting remains inconclusive the case shall be resolved by the arbitrator and the decision of the Arbitrator shall be final. An arbitrator shall be appointed by the mutual consent of the parties.

Auditors

Name of the auditor who shall audit the financials of the company and tenure of the auditor.

Further, the auditor of the company shall not be changed without the consent of the shareholders and directors.

Other

A shareholder agreement may also include the following clauses:-

• Binding Effect
• Free End Clear Of Encumbrances
• Authorization
• Notices
• Pro Rata Allocations
• Insurance
• Inclusion Of Marital Property
• Transfers Upon Death Of Spouse
• Lifetime Transfers
• Closing
• Exercise of Option
• Put And Call Options