Information What is Shareholders Agreement? And Clauses a Shareholder Agreement in India

Getting investors to join your business venture is an exciting and promising prospect. It opens up new opportunities for growth and expansion. When you sit across the table from your investors, you will need to prepare a precise and formal shareholders’ agreement. In this article, Information such as what is a Shareholder Agreement?, clauses of a Shareholder Agreement, and other information on the Shareholder Agreement in India is discussed.

Introduction

The relationship between the shareholders, as well as their rights and commitments to the Company’s management, is explicitly defined in the Shareholder Agreement. As a result, it is a crucial document that must be according to the Articles of Association. Investors want to document the agreed-upon parameters and safeguard their interests when start-ups ask for investment. While investors have the assistance of an attorney to safeguard their interests, you, as a start-up creator, should get familiar with the most important clauses of a Shareholders’ Agreement in India.

What is a Shareholder Agreement in India?

A Shareholder Agreement is simply a contract that establishes the relationship between the shareholders of a business or corporation. The rights and duties of shareholders, the transfer of shares, the operations of the firm, and all other valuable information related to the Shareholder is mentioned in the Shareholder Agreement.

Advantages of Shareholder Agreement in India

• It can be used to safeguard minority shareholders’ interests by requiring majority approval for major company actions.

• Shareholders in Shareholders’ Agreements have the freedom to choose the jurisdiction in which disputes originating from the agreement are arbitrated or litigated.

• The Shareholder’s Agreement ensures that the Shareholders have a legal relationship with the company.

Clauses of a Shareholder Agreement in India

• Assets and Liabilities

Investors will want to know that all of the company’s assets and liabilities have been disclosed to them. As a result, the board of directors would normally provide investors with warranties up to a certain sum.

• Shareholders’ Obligations

The duties and responsibilities of all parties to the agreement shall be clearly specified. The board’s working structure can also be indicated here. It’s also important to keep an eye on the interaction between minority and majority shareholders, as well as the board of directors and other shareholders.

• Special Rights

If you need money from a VC (Venture Capitalist), you may expect him to put himself on a higher level. This could be accomplished by more board seats, preferential rights, and a variety of other means.

• Questions That are Difficult to answer

Even if you never expect it, a firm might suffer from a variety of disasters. Some stockholders may wish to quit, a bank may withhold money, and some documents may be discovered to be ineligible. Each of them has ramifications that can be considered in this agreement.

• Transfer Limits

Some restrictions on the transfer of shares may be imposed under this agreement. Two typical clauses are the right of first refusal and the right of the first offer. Some clauses may also compel transfer through tag-and-drag-along rights. It’s also possible to define buy-back rights here.

• Vesting Periods

The agreement will spell out what happens to the shares if a director is forced to resign, as well as the vesting period for each shareholder and when they are deemed to have been offered for sale to the company and other shareholders.

Points to Keep in mind while drafting Shareholder Agreement

• One must comprehend the significance of a shareholders’ agreement, as well as why it is vital to strike a balance between shareholders’ and company interests.

• Don’t make the terminology confusing; instead, keep them specific so that their interpretation is limited. In the long run, broad interpretations cause problems.

• List the rights and obligations of both parties: the shareholders and the company, in a clear and concise manner.

• Keep in mind that there is a good chance a shareholder will desire to quit any provisions governing this procedure should be obvious.

• The following things should be clearly described in conflict resolution clauses: manner of dispute resolution, location of such dispute resolution, authorities and obligations, among other examples.

• The restrictions on the transfer of shares should be clearly established, as well as the process for doing so.

Conclusion

A Shareholder Agreement is a framework that safeguards the company’s interests and protects it from losses. To strike a balance between shareholder and corporate interests, every Shareholder Agreement must include the main provisions listed above.