Shareholders Agreement for Startups and Businesses in India – A Guide

A shareholders agreement is a legally binding contract between the shareholders of a company that outlines their rights, obligations, and responsibilities. It serves as a guide for how the company should be run and how disputes should be resolved. 

The importance of a shareholders agreement for startups and businesses lies in the fact that it helps protect the interests of shareholders and ensures that their rights are safeguarded. It also helps prevent shareholder disputes and provides a clear framework for decision-making within the company.

What is a Shareholders Agreement?

A shareholders agreement, also known as a stockholders agreement, is a legally binding contract between the shareholders of a company. It outlines the rights, obligations, and responsibilities of the shareholders in relation to the company and its management. A shareholders agreement typically covers issues such as the management and control of the company, the rights and responsibilities of the shareholders, and the transfer and sale of shares.

Purpose

The main purpose of a shareholders agreement is to protect the interests of the shareholders and ensure that their rights are safeguarded. It also helps to prevent disputes among shareholders and provides a clear framework for decision-making within the company.

Essential Clauses in a Shareholders Agreement

A shareholders agreement typically includes provisions such as:

1. Restrictions on the transfer of shares, including rights of first refusal
2. Provisions for the election and removal of directors
3. Provisions for the distribution of dividends
4. Provisions for the buyout of shares in the event of a shareholder’s death, disability, or retirement
5. Provisions for resolving disputes among shareholders
6. Information on how the company will be financed and managed
7. Restrictions on competing with the company
8. Details on how and when the company will be dissolved
9. Provisions for the protection of minority shareholders

It is important to note that a shareholders agreement differs from the articles of association or memorandum of association of a company which is mandatory legal documents filed with the Registrar of Companies in India. A shareholders agreement is a voluntary agreement among the shareholders.

Why Shareholders Agreement is Important for Investors?

Rights and Responsibilities of Shareholders

One of the key ways in which a shareholders agreement protects the interests of investors is by outlining the rights and responsibilities of shareholders. For example, it can specify the number of shares that each shareholder is entitled to and the percentage of ownership that each shareholder holds. It can also outline the rights of shareholders to participate in decision-making, such as the voting rights on important matters such as the election of directors or the approval of major transactions. This outlining helps ensure that all shareholders have a say in the direction and management of the company, and their interests are taken into account.

Decision-Making

Another important aspect of a shareholders agreement is the provision of a framework for decision-making within the company. The agreement can specify the procedures for calling meetings, the quorum required for meetings, and the voting rights of shareholders. This helps ensure that decisions are made fairly and transparently, and that all shareholders have an opportunity to participate in the decision-making process.

Dispute Resolution

A shareholders agreement can also help to prevent disputes among shareholders. The agreement can provide a framework for resolving disputes, such as arbitration or mediation clauses. This can help to avoid costly and time-consuming legal battles, which can be detrimental to the company and its shareholders. For example, a dispute resolution clause can specify the procedures for appointing an arbitrator or mediator, and the process for resolving disputes through arbitration or mediation. This can help to ensure that disputes are resolved quickly and efficiently, without the need for costly legal proceedings.

Purchase and Sale of Shares

In addition, a shareholders agreement can also include a buy-sell agreement, which is a mechanism for purchasing and selling shares in the event of a shareholder’s death, disability, or retirement. This helps protect the interests of shareholders by ensuring that shares are not sold to unwanted third parties. This is particularly important for startups as it ensures that the shareholding structure remains stable and that unwanted investors do not take over the company.

Legal Considerations of Shareholders Agreement

Shareholders Agreement is NOT mandatory

In India, a shareholders agreement is a voluntary agreement between shareholders of a company. It is not a mandatory legal document that needs to be filed with the Registrar of Companies. However, it is important to ensure that the shareholders agreement is compliant with the Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations. The agreement should not contain any provisions that are in violation of the laws and regulations.

Enforceability

A shareholders agreement is considered a legally binding contract between the shareholders of a company and is enforceable by the Indian courts. The agreement should be executed as a deed and should be signed by all the parties involved. It is advisable to consult a legal expert to ensure that the agreement complies with the laws and regulations and is enforceable by the Indian courts.

Tax Implications

There are certain tax implications related to a shareholders agreement in India. For example, the transfer of shares under a buy-sell agreement can attract stamp duty. Additionally, if the agreement includes a provision for the payment of compensation or remuneration, it may be subject to income tax. It is important to consult a tax expert to ensure that the agreement is compliant with the tax laws and regulations in India and to avoid any tax liabilities.

Signing of Shareholders Agreement

In most cases, all shareholders must sign the shareholders agreement in order for it to be legally binding as per the Companies Act, 2013. The agreement should be executed as a deed and should be signed by all parties involved. This includes both existing shareholders and any new shareholders who may be added in the future.

In some cases, a company may have a large number of shareholders, and it may not be feasible for all of them to sign the agreement. In such cases, the agreement can be signed by a representative group of shareholders on behalf of all shareholders as per the Companies Act, 2013. It is important to ensure that the representative group has the authority to sign on behalf of all shareholders and that the agreement is binding on all shareholders.

It is also important to keep in mind that if a new shareholder is added to the company, they should also sign the shareholders agreement as per the Companies Act, 2013. This will ensure that the terms of the agreement bind all shareholders and that the company is run fairly and transparently as per the Companies Act, 2013.

How to Draft a Shareholders Agreement?

A shareholders agreement is an elaborate document that requires a lawyer’s input. However, here is a list of sample clauses that a startup or a company in India must include in their agreement:

Identification of the Parties

This clause should include the names and addresses of the shareholders and the company.

Example: “This Shareholders Agreement (the “Agreement”) is made and entered into on the date of execution by and among [Name of the Company], a company incorporated under the Companies Act, 2013, having its registered office at [Address of the Company], hereinafter referred to as the “Company,” and the shareholders of the Company, listed in Exhibit A attached hereto, hereinafter referred to as the “Shareholders.”

Capital Structure

This clause should include the number of shares issued, the par value of the shares, and the percentage of ownership held by each shareholder.

Example: “The Company has issued and outstanding [Number] shares of common stock, with a par value of [Par Value] per share. The Shareholders hold the following percentage of ownership in the Company: [Shareholder 1] – [Percentage], [Shareholder 2] – [Percentage], and [Shareholder 3] – [Percentage].”

Management and Control

This clause should outline the rights and responsibilities of shareholders with regard to the management and control of the company, including the right to vote on important matters such as the election of directors or the approval of major transactions.

Example: “The management and control of the Company shall be vested in the Board of Directors. The Shareholders shall have the right to vote on all matters requiring shareholder approval, including the election of directors and the approval of major transactions. The Shareholders shall also have the right to call a special meeting of shareholders upon written request to the Board of Directors.”

Restrictions on the Transfer of Shares

This clause should include provisions restricting the transfer of shares, such as rights of first refusal or pre-emptive rights.

Example: “The Shareholders shall have a right of first refusal to purchase any shares that are offered for sale by another shareholder. In the event that a shareholder wishes to sell their shares, they shall first offer them to the other shareholders at the same price and on the same terms as offered to a third party. If the other shareholders do not wish to purchase the shares, the selling shareholder may then offer them to a third party.”

Buy-Sell Agreement

This clause should include provisions for the purchase and sale of shares in the event of a shareholder’s death, disability, or retirement.

Example: “In the event of the death, disability, or retirement of a shareholder, the remaining shareholders shall have the right to purchase the shares of the deceased, disabled, or retiring shareholder at a fair market value to be determined by an independent appraiser. The remaining shareholders shall have [time period] days from the date of notice to exercise this right.”

Dispute Resolution

This clause should provide a framework for resolving disputes and can include dispute resolution provisions, such as arbitration or mediation clauses.

Example: “Any disputes arising under this Agreement shall be resolved by arbitration in accordance with the rules of the Indian Council of Arbitration. The arbitration shall take place in [city], India, and shall be conducted in the English language. The arbitration award shall be final and binding on the parties.”

Governing Law

This clause should specify the governing law of the agreement.

Example: “This Agreement shall be governed by and construed in accordance with the laws of India.”

Entire Agreement

This clause should specify that the agreement represents the entire understanding of the parties and supersedes all prior agreements and understandings.

Example: “This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written.”

Concluding Remarks

To summarise, a shareholders agreement is an essential piece of documentation that is an essential part of the process of safeguarding the interests of investors in a particular company. It offers a framework for decision-making within the company and explains the rights, obligations, and responsibilities of shareholders in regard to the company and its management. Additionally, it outlines the rights of shareholders in relation to the company.

In accordance with the Companies Act of 2013 and the regulations of the Securities and Exchange Board of India (SEBI), the agreement helps to ensure that the company is managed in a manner that is both honest and open to all shareholders, thereby reducing the likelihood of disagreements between them.

For the shareholders agreement to be legally binding and enforceable by the Indian courts, it is critical that each and every shareholder sign it. In situations where it would be impractical for all shareholders to sign the agreement, it is possible for a representative group of shareholders to do so on behalf of the entire shareholder population. In order to ensure that the agreement is kept current at all times, it is essential to make sure that new shareholders sign it as well.

To safeguard their financial assets, startups and established businesses must to draw up a shareholders agreement as quickly as feasible. During the process of creating a shareholders agreement, it is strongly suggested that legal and tax professionals be approached for advice. This will guarantee that the agreement is in accordance with all applicable rules and regulations and will help avoid any potential legal or tax liabilities. The ability to attract investors and demonstrate that the firm is well-organized and has a clear governance structure can both be aided by a shareholders agreement that has been skillfully designed.

If you are not sure how to get a shareholders agreement, avail our legal documentation services for hassle-free processing!

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