In general shareholder agreement demarcates how a company is to be operated. It talks about the rights and obligations to the shareholders and most importantly about the relationship between the company and the shareholders. Looking towards a Shareholders agreement it is just similar to a partnership agreement that is an arrangement between various partners in a business.
The major purpose of a shareholder agreement is to ensure that shareholders are protected and treated fairly and equally. This allows them to make decisions on the third parties who may become shareholders in the future. This agreement is designed to protect all shareholders. This agreement is more important to minority shareholders. There is a demarcation that the majority of shareholders' obligation is to protect minority shareholders against abuse and give them a voice when key decisions are being made.
Importance of Shareholder Agreement
This agreement helps protect the interests of current shareholders from cases of abuse by future management if so happens. In case of new management or the company is acquired by another entity, the agreement helps to safeguard certain decisions of the company.
There are several issues but some of the issues covered in the shareholder agreement include corporate distributions, the management team of the company, and limitations on authorities. Some others are rights of minority shareholders, valuation of shares, voting of shares of stock, restrictions on the transfer of shares, allotment of additional shares, etc. This protects shareholders, and it can be used as a reference document if disputes are happening in the future.
Protection to Minority Shareholders:
The minority is somehow treated so as the minority shareholders lack voting control of the company, and in the absence of a shareholder agreement, these shareholders will face minimal influence in the running of the company. Power is the Key management of decisions and it can be made by the few controlling shareholders who own more than 50% of the company that is in majority. They may not consider input from the minority shareholders.
As we know that even if the articles of association protect the minority owners, the provisions can often be altered through special resolutions approved by the majority shareholders. There are several loopholes and shareholder agreements may address these loopholes by requiring that key company decisions be approved by all shareholders regardless of their voting rights.
These are certain rules that limit the ability of the majority shareholders to overrule minority shareholders when making certain decisions. These are such issues of new shares, taking new debts, and the appointment and removal of directors or any so.
Protection to Majority Shareholders
As mentioned about protecting the minority shareholders, the shareholder agreement may also protect the majority shareholders where minority shareholders are uncooperative, taking an example, majority shareholders may require the inclusion of a drag-along provision which means that it allows them to sell part or all of the shares at a specific time and specific price even if the minority shareholders are not willing to agree.
The shareholder agreement may include a clause that prevents minority shareholders from transferring their shares to a competitor, so this will be beneficial. While drafting an agreement it should also define rules on the sale and transfer of shares. Must mention who can purchase shares and about the terms and prices, etc.
Important clauses of Shareholder Agreement
Looking towards the contents of a shareholder agreement it can vary from company to company. Some of the contents of a shareholder agreement include:
1. Parties- This section of a shareholder agreement identifies the corporation as one party that is different from the shareholders or the other party.
2. Board of Directors and Board meetings - The shareholder agreement describes the role and requirement of the board of directors in the company that the decisions of the board should be approved by the majority of the shareholders. It mentions how frequently the board of directors should hold meetings and how directors selection and replacing procedure.
3. Reserved Matters –In reserved matters, the shareholder agreement must set out issues that cannot be passed without getting approved by all signatories. It needs not just majority support but approval of signatories. This procedure of making a list of reserved matters should be followed. All the shareholders are given the chance to see certain transactions to determine if they are prejudicial to their investment or not.
What matters are reserved? Some of the commonly reserved matters include changing share capital, acquiring or disposing of certain assets, taking on new debt, paying dividends, and changing the articles of association and memorandum.
4. Shareholder Information and Meetings-While making shareholder agreement it should include a requirement that shareholders are entitled to regularly update. This update on the company’s performance through quarterly reports and an annual report should be written. There must be a specific period mentioned when the reports should be sent out to shareholders. This agreement should also contain the matter of when shareholder meetings will be held and the time, date, and venue of the meetings to conduct.
5. Share Capital and Share Transfers- While drafting the agreement it should record the corporation’s share capital at the date when it is signed. As we know that changing share capital is one of the reserved matters. In this, the directors are prohibited from issuing new shares or changing existing shares into a new share without the signatories approving the required changes to in need or not.
The shareholder agreement contains provisions relating to share transfer. This provision is so such as to prevent share transfer to unwanted parties or transferring shares to a new party. Must contain a provision that what happens if a director or shareholder dies.
6. Amendment and Termination -In that agreement the process of amending or terminating the shareholder agreement should be provided for example, the shareholder agreement may be terminated upon the dissolution of the company. Termination based on the written agreement can be done or after the lapse of a specific number of years from the date of the agreement.
A shareholder’s agreement ensures that the relationship between the company and shareholders is laid down fairly. We ensure the protection of rights of both majority and minority shareholders with a personalised shareholders agreement. Pre-written agreements of such nature lay down the road map for conducting business.