Published Thu, 20 Apr 2023 Corporate Law
A shareholders' agreement is executed between the shareholders and the Company itself that specifies how a company should be operated and establishes the rights and duties of each shareholder. These contracts are purposefully written to set clear constraints in addition to the rights granted by the Companies Act and to offer particular privileges. A shareholders’ agreement definition states that it is a contract between the shareholders of a company and the company (to which the company is also usually a party) that defines the rights and responsibilities of the parties to the agreement over and above those provided by company law. The agreements provide for an arrangement that regulates the relationship between the shareholders, the management of the company, ownership of the shares, rights, obligations, and protection of the shareholders. It may also command the way in which the company functions.
It is a formal binding agreement between shareholders and the Company. The financing, organisation, management, and course of operations of the Company are all covered by a shareholders agreement. It explains the duties and commitments of the company owners. By deciding in advance how to handle any problems that may develop throughout the course of a business, it is intended to handle them. After consultation with and input from all pertinent shareholders and their pertinent advisors, each business will form its own shareholders agreement with varying procedures and substance.
It is a good practice to have a shareholders' agreement even if a corporation has articles of association that describe the rules and regulations for the business for further clarity and security.
The purpose of the shareholders’ agreement is to protect the rights of the shareholders from oppression by any future management. The shareholders’ agreement is vital for the following reasons:
Protection of rights of the Shareholders.
It defines the different roles and responsibilities of the Shareholders
Minimisation of Disputes through predetermined dispute resolution procedures hereby saving money, time, and energy.
It takes the role of a shield in protecting the interest of the minority shareholders against potential market risks.
It defines and regulates the relationship between the management of the company and its shareholders
It is binding only on the parties to the Agreement, as it is a contractual arrangement between the parties.
Prohibits minority shareholders from transferring their shares to competitors or other parties.
Management and right to appoint a nominee director: The directors of a company (not the shareholders) manage the company’s day to day business, and, a shareholders agreement, stipulates an automatic right for a shareholder to appoint a nominee director.
Information rights: It is important, especially for shareholders who are not also directors, to include in a shareholders agreement an obligation on the company to provide such information about the company as a shareholder may request.
Right of First Refusal: It is common to include provisions in a shareholders’ agreement to provide that any existing shareholder must first offer his/her shares to the other remaining shareholders at a certain price. Under ROFR, the Shareholders are restricted from selling their shares to an unrelated third-party without giving an offer to purchase to other Parties to this Agreement.
Drag-Along Rights: This clause gives majority Shareholders who want to dispose their shareholding to an unrelated third-party, a right to force the remaining minority shareholders to dispose their shares on predetermined terms as well
Tag-Along Rights: This clause is used to protect the minority shareholders of the Company. Thus, if majority shareholders want to dispose of their stakes in the Company, it gives the minority shareholder the right to join the transaction and dispose of their minority stake in the Company as well.
Anti-Dilution helps the Shareholders of the Company to maintain the value of their stake in the Company in case additional Shares are offered in near future.
Confidentiality It is recommended to provide that shareholders who receive confidential information about the company keep such information confidential, and to provide that they cannot use the information for any purpose that may be prejudicial to the company or the other shareholders.
Restrictive Covenants: A shareholders’ agreement may include restrictive covenants whereby the shareholders agree not to be interested in any other competing business. Such covenants may apply during the period in which a shareholder holds shares in the company and for a period after he/she ceases to hold such shares.
Dispute resolution: A shareholders’ agreement should set out the process for the resolution of any disputes between the parties to the shareholder’s agreement. This could be simply that disputes are referred to the courts under the respective jurisdiction. Alternatively, the Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to an Arbitrator appointed mutually by parties to the agreement. The decision of the Arbitrator will be final and binding on the parties to the Agreement.
A shareholders agreement can be useful for establishing guidelines for matters that concern shareholders, such as when one shareholder decides to sell their share in the future under circumstances outlined in a Shareholder Agreement that has been signed. The agreement's provisions must be made explicit to prevent any misunderstandings later on. All provisions made in the agreement must be compliant with all applicable legal requirements.