Why execution of Shareholders Agreements crucial for Company

Execution of shareholders agreement fills the gaps in the clauses not covered under the company’s constitution, through which corporate assign personal rights to Shareholders

Execution of shareholders agreement is always a good idea to prevent and resolve problems between shareholders and the company. In a properly-executed shareholder agreement it is clarified as to what extent they can enjoy the rights and makes clear what managements’ role is. 

Learning about Shareholders agreement

Shareholders agreement is an agreement between the sellers (Company) and buyers (Shareholders) of the shares that confer rights and impose obligations over and above those provided by the regulatory laws.

The Shareholders agreements provide for matters such as restrictions on transfer of shares, forced transfers of shares, nomination of directors for representation on boards, quorum requirements, majority rights available to certain shareholders at the board level or the shareholder level.

Shareholders agreements are important because it sets out all the terms of sale into writing which prevents misunderstandings.

Benefits of entering into Shareholders Agreement

·       Shareholders agreement provides specific information on the transfer of shares and rules governing the transfers.

·        Executing agreements allows businesses to raise revenue for the organization.

·        Shareholders agreement explains special tax treatments the shareholders may receive for the transfer.

·        Executing shareholders agreements allows the purchaser to claim dividends on their investment.

·        A dispute over various issues could be resolved between the purchaser and seller by executing shareholders agreement.

How the shareholders agreement can well drafted?

It is essential that some consideration be given in deciding the terms of agreement. Your shareholders agreement should contain at least some of the following provisions:

1.Information And Inspection Rights:

The shareholders should be given the right to have access with the information related to company’s financials.

In addition to the information and materials to be provided, shareholders should be provided with the right to visit the office for inspection at its own cost

2.Nomination of Directors

The holders of certain percentage of shares should be given the right to nominate Director on the Board or any committees of Board

3.Management related matters:

The holders of certain percentage of shares should be given the right to make the decisions with respect to control of the management like setting up the quorum for the board and shareholders meeting, passing of board and shareholders resolutions.

4.Representation & Warranties 

While executing the agreement the company should set out some of the representation-

§  like the agreement is legal, valid and binding;

§  the company will notify of any material changes made in the agreement or

§  approvals for the execution of this agreement have been obtained from the Governmental Authorities 

5.Right of first refusal

Entering this clause in an agreement is useful in case where the existing shareholder in the Company decides to leave, other shareholders will have the option to purchase the shares before they're sold to the outsiders.

6.Buy-back Rights: 

These give the company the right to claim back the shares of a certain shareholder on withdrawal or death of the shareholder.

7.Liquidation preference

The same clause used by venture capitalists in their term sheet, should also be a part of shareholders agreement where on the occurrence of an Exit Event of the company, the proceeds will be distributed first to the Investors before the other shareholders in order to recover their investment.

8.Exit Options

The Company shall provide an exit option  to the Investors in the agreement.

9.Confidentiality

This is the most important clause of any agreement which clearly spells out that contents of the Transaction Documents shall not be disclosed to any outsider without their knowledge and consent. In case if disclosed under the requirement of law/regulation or any order of any court/ authority it should be clearly specified in the agreement.

It is to be mentioned that the above clause of shareholders agreement are not exhaustive and totally varies according to the industry.

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