A Shareholders Agreement is a legal document that outlines the rights, responsibilities, and obligations of shareholders in a company. It’s especially useful for private companies and startups to avoid conflicts and ensure smooth business operations.
What is a Shareholders Agreement?
A Shareholders Agreement (SHA) is a binding contract between the shareholders of a company. It supplements the company’s Articles of Association and provides details on how the company will be run, how decisions will be made, and how shares will be handled in various situations.
Another most important provision in a shareholder agreement should be whether it allows the corporation to buy back its own securities in the event of a shareholder’s death. More often than not, sometimes the shareholders don’t want to be the co-owners with the heirs or children or spouses of their fellow shareholders as they lack the skills or the common interests of the respective original shareholder. In case the Company doesn’t possess enough money to buy back its own shares, then options must be provided in the shareholder agreement stating that the other shareholders can buy the same.
The list of common provisions also includes the right of first refusal in which a right is granted to the Company or other shareholders to purchase a shareholder’s securities if he or she wants to transfer it.
Key Elements in a Sample Shareholders Agreement
1. Parties to the Agreement
Names and details of all shareholders.
The company’s name and registered address.
2. Purpose of the Agreement
Why this agreement is being signed (e.g., to regulate ownership, voting rights, and transfer of shares).
3. Capital Structure
Details of the company’s share capital.
Shareholding percentage of each shareholder.
4. Rights and Obligations
Voting rights of shareholders.
Right to receive dividends.
Participation in management or key decisions.
5. Board of Directors
How directors will be appointed or removed.
Powers and responsibilities of the board.
6. Transfer of Shares
Rules on selling or transferring shares.
Right of first refusal (ROFR): Existing shareholders get the first chance to buy shares.
Tag-along and drag-along rights:
Tag-along: Minor shareholders can join if a major shareholder sells.
Drag-along: Majority shareholders can force minority shareholders to sell.
7. Exit Strategy
Provisions for exit, like IPO, buyout, or liquidation.
8. Deadlock Resolution
Steps to resolve disputes if shareholders can’t agree (e.g., mediation, arbitration).
9. Confidentiality
Non-disclosure clauses to protect business secrets.
10. Non-Compete Clause
Restrictions on shareholders starting or joining competing businesses.
11. Governing Law and Jurisdiction
Which country/state’s laws apply and where disputes will be settled.
Why is an SHA Important?
- Avoids disputes among shareholders.
- Protects minority shareholders.
- Clarifies business operations and decision-making processes.
- Helps investors feel more secure.
FAQs
Can a shareholder agreement be formed for more than one class of shares?
Yes, the shareholders agreement can be prepared for different classes of shares. Also the Companies Act, 2013 will prevail for varying shares and share rights.
However, the shareholders agreement can state the additional clause for compliances for variation in the shares, rights to shareholders etc. like requiring unanimous approval.
Under what cases the shareholders agreement are executed?
Mostly, the shareholders agreements are executed by the Limited Companies where there are a large number of shareholders. They are also executed by the companies when any foreign entity or person is admitted as a shareholder in the Company.