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-

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-

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.

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