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Shareholders’ Agreement and Why do You Need It?

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A shareholders’ agreement also called a stockholder agreement is an arrangement among shareholders of a company, incorporated under Companies Act, 2013 that describes the rights and obligation of the shareholders, operation of a company, valuation and allocation of shares.

What’s incorporated in a shareholders’ agreement

There are various sections included in a shareholders’ agreement that may differ from company to company according to the company’s requirements.

Company management and operation

This part of the agreement includes the description of the clauses related to:

  • The number of the board meeting, and venue.
  • Appointment, removal and replacement of investor directors.
  • The quorum of the board meeting and proceeding of the board.
  • Notice of the board meeting and content of the notice.
  • Chairman of the board and nomination of alternate directors.
  • The procedure of decision making on the board meeting and permitted mean of contemporaneous communication for participation in the board meeting.

Consent of shareholders

It comprises of such circumstances where the consent of shareholders in majority matters. Matters in which approval of shareholders will take place is mention below:

  • When the company requires to alter the Articles of Association.
  • When entering into filing for bankruptcy or amalgamation.
  • When dissolving the company and drafting a financial statement or distributing the dividend.

Liabilities of a shareholder

Shareholders’ agreement describes the liabilities of each shareholder because one of the reasons behind choosing the company over other types of business is limited liability, Which means that the company is a separate legal entity, hence separated from the shareholders. Liabilities that each shareholder carries are mention below:

  • Shareholders are not responsible for the actions of the company.
  • Where the company limited by guarantee, the shareholder is accountable only to the extent of the amount guaranteed by him.
  • Shareholders are held liable only to the extent of the unpaid amount of share capital concerning the shares held by them.

Protection of minority shareholders

The rights of the minority shareholders have been given importance since the introduction of the Companies Act, 2013.

  • The requirement to appoint a small shareholders director.
  • Right to institute a class action suit against the company and the auditors.
  • Right to appeal to the board in a matter of mismanagement or abuse.

Arbitration

It will be hard to say that a company won’t face any dispute within or outside the company. Therefore, a company’s shareholders’ agreement needs to have a clause related to arbitration for the speedy resolution of any disputes that may arise in future.

Amendments and Termination

The process of the amendment of the shareholders’ agreement and the events causing the termination of a company, should be included in shareholders’ agreement.

Why do you need a Shareholders’ Agreement?

  • Gaining Control: A shareholder’s agreement will ensure that shareholders will have a legal association with the company, including setting or modifying rules and guidelines.
  • Ensure privacy: While the Articles of Association are made public, the terms of a shareholders’ agreement is private.
  • Protect position: Shareholders’ agreement ensures the position or roles of shareholders, within a company, is protected.
  • Protects smaller shareholders: A company may have the majority and minority shareholders. A stockholders’ agreement defines the role and defends the rights of minority stockholders within a company.
  • Purchase of Shares: A minority shareholder will have access to purchasing shares from other shareholders, just like a majority shareholder.

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