Updated July 24, 2023
Introduction to Shareholders Agreement
Let us start with elaborating on the term “shareholders agreement”, the first-word shareholder means those investors who have invested their money in the share capital of the company for the sake of capital appreciation along with earning dividend income which the company declares according to the earned profits and on the other hand agreement means a mutual understanding between two or more parties to agree upon the same thing whether written or not, so the term shareholders agreement means the agreement between the shareholders and the company at the time of making investments.
Explanation
Generally, it is seen that for agreeing upon the same thing, one could enter into an agreement to secure himself from the change in terms & conditions after execution of the terms agreed. From the perspective of the shareholder’s agreement, an agreement is made between the shareholder and the company regarding the investment, allotment, lock-in period, and terms of investment, for securing the interest of shareholders as everyone wants some written proof that they have invested in the capital of the company on the terms mentioned in the agreement.
Purpose
- It is a well-settled statement that the company has its own separate entity whose operations are managed by the appointment of the directors or key managerial personnel.
- All the decisions on behalf of the company will be taken by the voting of the shareholders of the company chaired by the chairperson of the company.
Features
- It deals with the provisions of how decisions by the board of directors are taken on behalf of the company.
- It gives a detailed description and manner of how the decisions will be taken on behalf of the company.
- It elaborates on the responsibilities laid upon the shareholders of the company over and above investing the amount in the shares of the company.
- It clearly defines the actions on which the shares allotted to the shareholder will be forfeited by the company.
Types of Shareholders Agreement
Before going into the types of shareholder’s agreements, first, it is important to know the type of shareholders as well; there are two types of shareholders:
- Equity Shareholders (who have invested in the equity share capital of the company)
- Preference Shareholders (who have invested in the preference share capital of the company)
As can be seen from the name itself that the preference shareholders will get preference over equity shareholders in the event of liquidation of the company, but they did not have any voting rights in the decision-making of the company.
Now, there are two types of a shareholders agreement, namely:
- General Shareholders Agreement
- Unanimous Shareholders Agreement
Examples of Shareholders Agreement
The general provisions or terms which are mentioned in the shareholder agreement are as follows:
- General details of the company and of the applicant such as name, address, date of the agreement, number of shares applied, etc.
- Defining the terms mentioned in the shareholder agreement, such as a reference to the company, will be named a company; the applicant will be the share applicant who had applied for the company’s shares.
- About the company’s organizational structure, such as the layout of the key managerial personnel, promotional layout, etc.
- The rights of the first refusal, i.e. any new shares allotted, will first be offered to the company’s existing shareholder.
- The provisions regarding the transfer of shares, etc., of the shares of the company.
- The companies’ policy regarding dividend declaration, payment, etc.
- Transferability of shares consequent upon death of the shareholder of the company.
- Manner of transferring the shares and change in the nominee details of the company.
- Events in which the shares allotted to the shareholders will be forfeited by the company.
- The manner in which payments will be made to the shareholders of the company in the event of liquidation of the company, i.e. how the shareholders will receive the money if the company goes into liquidation.
Advantages and Disadvantages
Below are mentioned advantages and disadvantages.
Advantages
- In case of any dispute between the shareholder and the management of the company, the terms mentioned or agreed upon in the shareholder agreement will be checked and considered to resolve the dispute.
- One can bound the company to act upon the terms agreed upon or decided by executing a shareholders agreement.
- A shareholder’s agreement is admissible evidence in case of any dispute or to prove the genuineness of the transaction.
Disadvantages
- Sometimes, there is no shareholder agreement between the shareholder and the management of the company; in that situation, the disputes that arose will be resolved by considering the terms mentioned in the article of association (AOA).
- The major disadvantage of shareholders agreement from the perspective of the company’s directors is that by voting of more than 50% in favor, the company’s shareholders can remove any director of the company from its position.
- One of the disadvantages of an agreement is that the minority shareholders, by executing the shareholder’s agreement, override the provisions mentioned in the AOA of the company and also the majority shareholders.
Conclusion
It is a very important document from the perspective of the shareholders or investors of the company who had invested in the shares of the company and provide funds to the company to manage the operations of the company and expand their business for the sake of capital appreciation as when the company earns more the value of a share in the market also rises. Not every organization enters into the shareholder’s agreement; it is the rarely executed agreement as it bounds the company. In case of any dispute, it can be easily resolved by giving preference to the shareholder’s agreement executed. It is advisable for every person who has invested their hard-earned money in the shares of the company to execute a proper agreement at the time of application and allotment of shares of the company.
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This is a guide to the Shareholders Agreement. Here we discuss the types and features along with advantages and disadvantages. You may also look at the following articles to learn more –
