Transaction Advisory Services
| June 04
An insight into the shareholders agreement
In today’s uncertain times, nothing can be guaranteed orally, whether it is a business deal or an arrangement among the Shareholders of the Company. And such a fear of uncertainty drives us to behold documentary evidence that can later put an estoppel on the other Party from backing on their so-called promise. A reflection of the same is evident in the form of innumerable number of Agreements that are drafted on a daily basis like a Shareholder’s agreement or in short an ‘SHA’.
A Shareholder’s Agreement or an SHA is also called a Stockholders Agreement. This agreement can be better understood as an arrangement among the shareholders of a corporate entity with respect to various facets of the Shares held by them in the Company. In order to ensure that there remains harmony between the Shareholder and the Company as well as among the Shareholders; Companies usually resolve to draft an SHA. The Agreement lays out a framework of rules, obligations, duties and rights of the respective Shareholders and also describes in what manner the shares are to be held by them.
In addition to detailing the liabilities of the Shareholders, the Agreement also emphasizes upon the various immunities available to shareholders.
Usage and Importance
It is interesting to note that even though Shareholders Agreement do not come as a Legal Requirement but nevertheless almost all corporate entities end up drafting one. This necessity can be cited due to many reasons as follows:
? Firstly, a Shareholders Agreement in place ensures that you when your company has more than one Shareholder, then they both perform their respective obligations in harmony with each other;
? Secondly, a shareholders agreement acts as a form of ‘Constitutional Document’ or we can say like a ‘Bible’ for them and guiding them as to what they can do and what not;
? An SHA therefore sets defined boundaries for the Shareholders to ensure clarity and certainty for the smooth functioning of the Company;
? SHA through its terms enables the shareholders to have a say in certain ‘restricted’ when they are not the directors of the company, and lack any position to control the affairs of the company;
? SHA sets out the rules for the contribution of each party when the shareholders have formed the company for a specific joint venture.
? One of the most important thing done by SHA is the classification of ordinary A and ordinary B shares and setting out the rules for them. This is done when the shareholders desire to have equal rights in voting but varied rights in dividend return, return of capital on a sale etc.
? Finally the most important significance of a Shareholders Agreement is to protect the Minority Shareholders against the undue influence of Majority Shareholders;
Shareholders Agreement v/s Articles of Association
Just like a country needs a constitution to run and work, similarly a Company needs an AOA or Article of Association which acts like the Constitution of the Company thus detailing out all the criteria’s on the basis of which the Company is to be functioned. The Article of Association charts the purpose of the Company along with miscellaneous provisions like appointment of Directors, provisions regarding shareholders and so on.
Since both an AOA and an SHA lays down covenants with respect to Shareholders, there often arises conflicts between the two.
A common parlance in such cases is that the AOA must prevail over an SHA. Thus if there is any provision in an SHA which is not a part of the AOA, such a provision cannot be enforced until and unless the same has been deliberated upon in the AOA. A lot has been pondered upon on this subject in the Indian Courts as well. In the case of VB Rangaraj v. VB Gopalakrishnan [AIR 1992 SC 453], the Honorable Supreme Court held that if any restrictions were imposed by way of an SHA which acts contrary to the clauses and covenants of an AOA, then such a restriction would not be applicable on the subjects of the Shareholder’s Agreement. Similarly in the case of Vodafone International Holdings BV v. Union of India [Civil Appeal No.733 (2012)], the Honorable Court resolved to a more open interpretation by upholding that the Shareholders may enter into a Shareholders Agreement in good faith until and unless the Agreement is not conflicting with the Articles of the Company. The court even went on to quote that the Shareholders may even approach the Court for legal remedy in case of breach of the SHA.
IMPORTANCE OF SHAREHOLDERS AGREEMENT FOR STARTUPS
If you own a Start-up, then having a Shareholders agreement is of utmost importance. This is mainly because a newly incorporated entity requires cash inflow or capital urgently in the growth time, and that can be ascertained via issue of shares more efficiently. Therefore when a newly incorporated entity issues its shares for the first time, then in such a case drawing a Shareholders Agreement can prove to be beneficial for the Company and its new Shareholders; it also instils a sense of trust among the new stockholders. The Agreement in place ensures that both the Company and the Shareholders are on the same page.
We at Findoc understand how important it is for a Company to remain tactful and on safe side in the early beginning, hence we bring forward to you services wherein we offer full assistance in place to help you in Drafting a Shareholders Agreement which suits best to the needs of your corporate entity while remaining under the limitations place by Law in force.