By Anika Mardiah Chowdhury
A shareholders agreement contains provisions regarding the business activity and the relationship between the shareholders and the corporation. It is also known as a stockholder’s agreement. Also, the shareholders’ agreement protects the shareholder’s investment in that entity and is beneficial to minority shareholders, who usually have limited control over the business operation.
A shareholders’ agreement describes the rights and obligations of shareholders, the issuance of shares, the operation of the business, and the decision-making process.
Purpose- usually when a corporation is created more than one person invests there, therefore their decision-making powers and rights need to be clearly defined. Without an agreement, decisions can become conflict, powers can become unbalanced and accountability becomes hard to enforce. Thus to bring some rules, and regulations and to avoid issues or confusion or in terms of the administration of the company an agreement is necessary. The main purpose of a shareholders agreement is to control the company’s owner and the shareholders who invest in the company.
Obligations- as for the company rules is required, therefore shareholders also required to abide by a series of rules and the shareholders’ agreement includes the obligations of shareholders to use their powers for their defined purpose.
A shareholders’ agreement should be clear, and detailed and all agreements need to include components describing how the business will run. Along shall include how to resolve issues between shareholders and what each shareholder’s responsibilities.
Shareholders’ agreements usually contain the following key provisions-
- Preamble- identifying the parties or shareholders must be included and the company name and identity.
- The key goals of the agreement- this clause shall include the list of goals or purposes how implement.
- Administration– How the company will be run and the information about appointing or removing directors, board meetings, management information, banking arrangements and other important financial details.
- Shares– this clause will include the optional and mandatory buying-back of shares by the company in the event that a shareholder gives theirs up and the consequence in the event of the death of a shareholder. Also includes share transfer provisions or restrictions, pre-emption rights and entitled to acquire or hold shares in the company.
- Rights to purchase- the right of purchase or refusal clause details how the company has the right to purchase a selling shareholder’s securities to an outside party.
- Rights and responsibilities – the agreements may also include the rights and responsibilities of the shareholders for example voting rights of shareholders, veto rights and others.
- Dividends- this clause includes the profits of the company how distributed to shareholders and how that will be outlined, for example, the dividend policy of the business.
- Fair price for shares.
- A potential description of an insurance policy.
Along with the above provisions, a shareholders’ agreement may also contain the share issuing date, the number, the percentage ownership of each shareholder, how votes are decided and how shares are created. Also may contain some following clauses-
- Directors Structure- this will regulate or state detail decision-making policies, rights of shareholders to appoint or remove directors, and the powers of directors.
- Meetings- this clause may include the schedule for meetings for the shareholders and directors. Also, this clause may require for avoiding confusion in terms of fixing the meeting scheduled. This clause may contain what procedures will be in place and voting procedures.
- Provisions regarding buying and selling shares– this clause the rights and obligations of shareholders to buy or sell their shares and way to value shares.
- Financing- includes shareholders contributing capital to the company and what happens if a shareholder can no longer contribute.
- Restrictions- restrictions on share transfers some control over the shareholders whom they are doing business with.
- Protection of minority shareholders- minority shareholders can be swept along with the tide for certain decisions hence agreement must include a clause for the protection of minority shareholders.
- Dispute Resolution- this is the most important clause in the agreement as this lays out that agreement will mention the framework and procedure for dispute resolution procedure to resolve any conflicts between shareholders as well as consequences for breaches of the agreement. Along with which law to follow or procedure to resolve.
- Governing Law- usually the agreements do not contain this clause because the company is governed by and constructed in accordance with the laws of the Country and in terms of any disputes arising out of this agreement resolved in the District Court. But agreement clause may contain the arbitration procedure to be followed if any disputes arise.
- Protections for the Company- This clause will lay out rules to protect the company that could include limiting shareholders from being involved with competition or restrictions on shareholders’ interaction with customers.
- Market value determination– the market value of the shareholders may decide by adding any clause to the agreement and if the Partners concerned cannot agree on what the market value for the shares will be, the market value shall be determined on the basis of an arms-length third Partner purchase offer for the shares.
- Stability of business– agreement can prove to be an important tool that ensures stability in the business of the company. This stability will clearly speak for it thereby will maintain the relationship among the shareholders.
- Confidentiality- the terms of the shareholders’ agreement are normally confidential to the parties if not otherwise agreed in the agreement. Also, the Partners shall hold in confidence and shall not disclose to any third Partner without the prior written consent of all the Partners the material contents of this Agreement unless disclosure is required by law, regulation, stock exchange rules, or order of a court of competent jurisdiction.
- Others– this clause may add if any Partner encounters liabilities from these agreements or restrictions, the Company will cover those liabilities, compensation or legal costs and others. Also under this clause may also add the board shall make the final decision and to what extent the Company covers the costs.
- Termination- usually the agreement comes into effect after signing by the parties but in case of company winds down or when if shareholders simply no longer want to comply with the shareholders’ agreement, thus a clause for termination of the agreement is also required.
Binding Effect- shareholders agreement has a binding effect as soon as signed by the parties. Usually, legally binding contracts require four elements: offer, acceptance, consideration, and the understanding that a contract is being formed, as in terms of purchasing shares the consideration meets and sign the agreement meets the acceptance. Therefore the agreements are like a contract that has legally binding effects.
There are a number of cases where the provision of the Shareholders’ Agreement was upheld to resolve the dispute between the Shareholders. Moreover, orders of the Hon’ble Court given by following the provision of the Shareholders’ Agreement were presumed to be justified. i.e. H.B.M. Iqbal vs. Md. Shirajul Islam and Others (Civil Petition for Leave to Appeal No. 1691 of 2008), where the Petition of Leave to Appeal was dismissed because the impugned order of the High Court Division was given to seek to protect the interest of the minority shareholders of the company and other respondents were directed to transfer the disputed share in terms of Article 5 of the shareholders’ agreement.
Lastly, Shareholders’ agreement plays a key role in the administration of a company as it binds the shareholders and the company together. Also, the shareholders’ agreement is not rigid as an Article of Association because it allows the shareholders to add any clause if required or for their benefit of them. It is to be mentioned that each shareholder’s agreement is different from the other, thus the structure may differ but the important thing is to make the agreement as detailed and easy to understand.