Shareholders Agreement
- CS Shirish Bhootra
- Sep 12, 2022
- 3 min read
Written by CS, Shirish Bhootra
Shareholders Agreement: Meaning
A Shareholders Agreement is a contract that discloses the type, nature, terms, and conditions of a business signed by the shareholders of a company. It may be signed by some or all of the shareholders of the company. It also discloses the rights and obligations of shareholders. It may be signed irrespective of holding i.e. signed by an individual or directors on behalf of the holding company. It is to executed when more than one shareholder exists. It protects the interest of shareholders as well as the company by disclosing relations between both.
Key Factors :
It is a contract that discloses relations between the company and its shareholders, and the rights and obligations of the shareholders.
There are two types of agreements: General shareholders agreement and Unanimous shareholders agreement.
Its key contents include details about shareholders, their shareholding pattern, their rights, obligations, and termination, and information about the company business, its directors, etc.
It also highlights the right of pre-emption, meaning thereby the right of existing shareholders to buy shares of shareholders who want to sell their shares and quit the entity.
It discloses that business operations should be in such a manner that they are not in conflict with shareholders’ interests.
It also focuses on corporate actions like profit distribution, share valuations, and other related aspects.
It also discloses the rights of the minority as well as the majority shareholders.
It also establishes healthy relations between minority and majority shareholders by having effective cooperation of both in business decisions.
Shareholders Agreement: Variants
Shareholder’s Agreement has two variants, one is General and the other is Unanimous.
A General Shareholders Agreement is drafted taking into consideration the legal provisions applicable to the company.
A Unanimous Shareholders Agreement is focused on the shareholders' interests. It also monitors and governs the working of directors. It is a mechanism through which the director's powers may be transferred to shareholders under common laws.
Format:
A Shareholders Agreement begins with a preamble that discloses about parties to the agreement and thereafter the following are being included :
Definitions:
It discloses the terms used in the contract along with the references and interpretations so that the clauses followed have clarity and no ambiguity and the parties must be easily able to understand all terms.
Business Information:
This clause comprises business details like the type, nature, and vision of the company. It also includes the operational mechanism that has to be followed and shareholders' accountability and responsibility in this regard how shareholders would be responsible and accountable for it.
Composition of Board:
This clause of the agreement highlights the role of the board of directors, their working mechanisms like their meetings, their appointment, termination and related aspects.
Shareholders’ Holding Pattern:
This clause of the agreement focuses on the action which may affect shareholders' holding, like buyback of shares, prospective mergers, and acquisitions.
Termination:
This part of the agreement deals with instances that may lead to the termination of the agreement.
Confidentiality:
The most important clause of the agreement which makes the parties involved in the agreement assured that the information shared by them would not be made public except under situations mentioned for disclosure.
Miscellaneous Provisions:
Other provisions that parties would like to add to the agreement are mentioned under this clause like profit distribution etc.
Example:
A look at shareholders’ agreement example to view how such document begins with:
Pros and Cons:
A shareholders' agreement resolves the chances of disputes occurring between parties to the agreement. However, there are certain cons that must be considered before formation or execution of such agreement so that it does not turn out to be a waste of time.
Pros: 1) Helps maintain privacy
2) Fair dealings
3) Dividend policy
4) Protects minority shareholders
Cons:
1) Limited Rights
2) Chances of being lost
Conclusion:
It may be concluded that an agreement plays a vital role in ensuring that the company operates taking into consideration the shareholders' interests.
References:
Wallstreetmojo Editorial Team, reviewed by Dheeraj Vaidya, CFA, FRM, Shareholders Agreement, retrieved from Shareholders Agreement - Meaning, Example, Sample Format (wallstreetmojo.com)
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