A company is an artificial person. In India, companies are governed through The Companies Act, 2013. Even though the ownership of companies is under the hands of the shareholders, the management of companies is done by a set of persons known as the board of directors. Also, since there is a difference between ownership and management in a company form of organisation, it is preferred that the relationship between the shareholders and the company be made clear in writing by way of a contract. The agreement made between a shareholder and a company is called a shareholders agreement.
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Shareholders are persons who invest their money in a company. By investing in the company, they get shares of the company. Shares give ownership to the shareholders for the part of their holdings. The relationship between a company and its shareholders is based on mutual trust.
What is Shareholders Agreement?
Shareholder’s agreement is a contract between the company’s shareholders that sets forth how the company should be operated and states the rights and duties of the shareholders among themselves. This agreement is between companies and family companies, joint venture companies, venture capital investments, private equity investments, strategic alliances, etc.
Shareholders’ agreements are generally mutual agreements within the shareholders on the terms and conditions to which the company becomes a consenting party. A shareholder’s agreement is made to specify the rights, obligations, duties and restrictions applicable to shareholders besides those mentioned by the Companies Act, 2013.
Importance of a Shareholder’s Agreement
An agreement is always a road map to the people who have entered it. Likewise, a shareholder’s agreement provides a detailed outline of the rights and duties of the shareholders and the company. And therefore, in the event of any dispute between the two, a shareholder’s agreement can guide resolving disputes and help protect the interests of the shareholders.
Enforceability of the Shareholder’s Agreement
According to the Companies Act, 2013, any shareholder’s agreement that contradicts the Articles of Association of the company is void, i.e. invalid.
Rights of Shareholders under Companies Act, 2013
- Right to appoint Directors
- Right to appoint Auditors
- Right to Vote
- Right to take legal actions against the directors
- Right to call for a General Meeting
- Right to get copies of the financial statements of the company
- Right to inspect registers and books of the company
- Right to receive dues during the winding up of the company
Effects of Shareholder’s Agreement on Minority Shareholders
Minority shareholders in a company are the equity shareholders who hold less than 50 per cent of the company’s equity share capital. Due to lesser holding, their voting rights are limited. A shareholder’s agreement can help protect the interests of the minority shareholders.
A shareholder’s agreement can make provisions concerning the rights of the minority shareholders. Provisions can be made regarding the decisions that cannot be taken without the unanimous consent of all the shareholders.
In that situation, even if a single shareholder disagrees with something, a minority shareholder cannot finalise the decision on that matter. By that means, these shareholders can merely exercise their voting rights and decision-making rights.
Contents of Shareholder’s Agreement
- Like any other agreement, a shareholder’s agreement must start with the details of parties to the contract, including the shareholders and the company.
- The shareholder’s agreement must include the details of persons having agreed to take the company’s management, i.e. the board of directors and appointment of directors.
- The parties’ consent to the contract agreeing to the terms and conditions in writing.
- Information about the registered office of the company
- Description of the business of the company
- Details of the authorised share capital of the company
- Details of shares subscribed to, of the shareholders who are parties to this contract
- Details regarding the limits of further issue of capital
- Details of the Board of Directors
- The rights of shareholders to nominate additional directors, or removal of directors with proper notice
- The appointment of chairperson and the nominee of the chairperson
- Details of the Managing Director and their powers
- The right of shareholders to vote and its limits
- The obligations of shareholders with respect to voting
- Details of the Auditors of the company
- The provision for change of auditors of the company
- Provisions regarding sale and or transfer of shares
- Details regarding working capital, loans and advances, collateral securities etc.
- The rate of interest payable to any shareholder for bringing in capital
- The provision that the parties to this contract would not disclose business information or any confidential information of the company’s business to any outsider or the clients of the company or customers or other stakeholders.
- The shareholders should ensure that they, their representatives or their proxies or agents who represent them in their absence will act in accordance with this agreement.
- If any resolution is passed contradictory to the terms of this agreement, the shareholders or their proxies or agents or representatives should vote against such resolution.
- The shareholders, individually and jointly, should ensure that the Board of Directors exercise their rights at meetings, passing of resolutions, and all other duties are complied with.
- Provisions regarding breach of any of the provisions of this agreement
- The modification or alteration of this agreement cannot be binding on any shareholders unless it is signed by them.
- This agreement cannot be transferred or assigned to any other person without the consent of the other.
- This agreement should also include a dispute resolution clause, the terms and conditions for calling out for Arbitration and Conciliation, which should be conducted in accordance with the Arbitration and Reconciliation Act, 1996.
- This agreement should contain the provision that this agreement covers all the matters it requires to and it shall prevail over any such agreement made previously.
- The agreement should be attested by the witnesses.
- It should be duly signed by the parties to the agreement, i.e. the shareholders and by the directors on behalf of the company.
To sum up, a shareholder’s agreement is a detailed document, and a lot of aspects need to be taken into consideration. It is advisable that due care is taken in drafting such agreements, and any agreement made under the Companies Act, 2013 is in line with the act.
Landmark Cases on Shareholder’s Agreement
- V.B. Rangarajan versus V.B. Gopalakrishnan
In this case, the Supreme Court held that a restriction not specified in the Articles of Association is not binding either on the company or on the shareholders.
- M.S. Madhusoodhanan versus Kerala Kaumudi Pvt. Ltd.
In this case, the Supreme Court held that a restriction in relation to identified members on identified shares of a private company did not amount to restriction of transferability of shares per se (i.e. in itself).