How to Start a Shareholder’s Agreement

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What is Shareholder's Agreement?

A shareholders agreement is an arrangement among the shareholders of the company. This type of agreement describes how the company should be operated and the shareholder's rights and obligations.

It includes information on the regulation of the shareholder's relationship, ownership of shares, management of the company, and privileges and protection given to shareholders. It governs the shareholder rights and obligations, transfer of shares, and regarding the finalization of the important decisions.

Benefits of shareholder's Agreement

  • Shareholder's Agreement specifies all the powers & rights of a shareholder. Moreover, it also acts as a regulator of the relationship between small and large shareholders.
  • Shareholders' Agreements are perfect for small and medium companies as in case of minor changes it does not require to amend the constitution every time.

Shareholder's Agreement is considered as one of the main documents for a company. It is a legal agreement between the shareholders of a company, which establishes a fair relationship between the stakeholders and govern the operation of the company.

Here are the following areas covered under Shareholder's Agreement

  • Rights and obligations of the shareholders.
  • Rights and obligations during transfer of shares.
  • Right and obligations of the management of the company.
  • Rights and obligations of the Investor.

It is an agreement which is entered into by the present stakeholders of the company, investors and the company. In shareholder's agreement business activity is defined which is proposed to be conducted by the company for which shareholders have come together. In the agreement it also includes a clause to change a business activity of the company with the consent of all the shareholders.

Frequently Asked Questions

A shareholders agreement is an arrangement among the shareholders of the company. This type of agreement describes how the company should be operated and the shareholder's rights and obligations.

The term “Rights” includes Right to Call a Meeting, Right to Vote, Right to Appoint Auditor, Right to Appoint Directors, Right to Inspect Books of Accounts, Right to Copies of Financial Statements, etc.

The different methods of evaluating shares are Asset Evaluation Approach, Market Evaluation Approach, and Income Evaluation Approach.

Whenever we talk about the company's management, the term “Minority Shareholders” denotes those shareholders who have not been appreciated much in terms of powers and authorities. Apart from this, the rights of a minority shareholder have been given much significance after the introduction of the Companies Act, 2013.

The privileges given to a Minority Shareholder are Right to apply to the Board; Right to create a “class action suit” against the auditors, directors, and the company; and Obligation to appoint a “Small Shareholder Director”.

The advantages of drafting a Shareholders’ Agreement are Separation of Powers, Allows Amendments, Ease in Purchasing Shares, Protects Minority Shareholders, Imposes Restrictions on Shareholders, Safeguards Privacy, and Imposes Restriction on Transfer of Shares.

The issues covered under a Shareholder Agreement are Right and Obligations of the Shareholders, Right and Obligation on Transfer of Shares, Rights and Obligations on the Management of the Company, and Rights and Obligations on the Investor.

No, it is not allowed to transfer shares without restrictions. All the restrictions regarding the transfer of shares are covered under the Shareholders Agreement.

Yes, it is always advised to consult an experienced lawyer for drafting a Shareholders’ Agreement.

A Shareholder Agreement with vague and ambiguous provisions and clauses will increase the chances of future disputes and litigations.

The term “Capital Dividend Account” denotes an account that provides dividends to the shareholder without even paying taxes. Therefore, a Capital Dividend Account plays a crucial role in the drafting of a Shareholders Agreement.

Normally, the process of drafting a Shareholders’ Agreement will take around 3 to 4 days time.

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Rishab khatri

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