Key elements of shareholder agreement

                Key elements of shareholder agreement

Purva Tambe;
Studying at  ILS law college(pune)
Course: 3rd year BA.LLB
 What is an agreement?
A mutual understanding between two or more legally competent individuals or entities about
their rights and duties regarding their past or future performances and consideration.
What is a shareholder’s agreement?
A shareholder agreement, also called a shareholders' agreement, is an arrangement between a
company's shareholders that specifies how the company should operate and describes the rights
and obligations of the shareholders. The agreement includes details of the company's
management and rights and protection of shareholders.
 What are the fundamentals of a shareholder agreement?
The shareholders' agreement is intended to ensure that the shareholders are treated fairly and
their rights are protected .This agreement contains sections outlining the fair and equitable price
of the shares (especially when sold). It allows shareholders to make decisions about what
external parties can do as future partners and provides protections for minority positions.A date
in a shareholders' agreement, often outlining the number of shares issued, a capitalization table,
outlining the shareholders' and company's percentage of ownership, any restrictions on the
exchange of shares, the current shareholders' prior rights to purchase the shares (if there is a new
problem maintaining the percentage of their ownership) ), And details of payments in case of
sale of a company.
 Why is shareholder agreement important?
Its purpose is to protect the investment of the shareholders in the company, to establish a fair
relationship between the shareholders and to manage how the company operates. Agreement:
Establishing the rights and obligations of the shareholders;providing an element of security for
minority shareholders and the company.The shareholder agreement is entered into to resolve any
dispute between the shareholder and the company. While we can be sure that nothing will go
wrong and nothing is known for sure, such agreements can help dissolve disputes and maintain a
healthy relationship between shareholders and the company. It helps to protect the investment
made by a shareholder and lays down the terms and conditions for shareholders and any other
party associated with the company. It is necessary to regulate a partner’s contract because not
every partner is the same. An agreement should be made keeping in mind that each person is
different and has a different opinion on the issues or matter involved. They may or may not agree
with each other.
  Key elements of shareholder agreement
1. Share subscription
Share subscription agreement is a promise made by a potential shareholder, also known as a
subscriber, that the subscriber becomes a shareholder (shareholder) at a fixed price in exchange
for financing and providing the company in the agreed number of “installments” Allocating a
certain number of shares. A stock subscription agreement should include the number of shares
issued to the shareholder and the order and timing of the financial progress. Sometimes it seems
that a stock subscription agreement sets the terms of a term sheet completely and accurately.
2.  Sale of shares
The sale of shares can be problematic if there is a dispute between the two shareholders, but
arranging for such events can be provided in the shareholders agreement. This can be done with
a number of different procedures, including tag, drag, round supply, lock or a combination of
these.These types of arrangements are designed to provide a solution to a stakeholder's failure to
come to an agreement on how to resolve it.
3. Company operations

The agreement can also cover the activity of the company, such as the right of a minority share
holder to nominate a director to the board of the company or to the board of directors. While
shareholders directly influence the company's operations by selecting senior management staff,
they also influence the company's operations in other ways. For example, most investors tend
to invest in stocks that can meet their earnings targets, thus holding businesses under constant
pressure to reach their revenue and profit forecasts.
4. Vetoes
The incorporation of these clauses protects shareholders who own less than 50 % of the shares
in the company by allowing them more insight into fundamental decisions. Such minority
shareholders typically have very little say in the company's operations if they are out-voted by a
majority, so veto rights in the Shareholders' Agreement are used to empower minority
shareholders. One of the most important sections of a shareholders’ agreement is a vetoes
section which lists out a series of transactions which cannot be carried out without the consent
of the protected minority shareholder
5. 50/50 shareholders and deadlock
A critical part of any agreement will also deal with a situation in which there are two
shareholders with 50 per cent each and no agreement on the substantive course of action.
6. Non-compete covenants
It is normal to have a non-competition arrangement to prohibit shareholders from interfering
with the company as long as they are shareholders. This will include rivalry with the company
customers, the recruitment of the company's suppliers and the recruitment of company
workers.Some of the most common provisions in the shareholder agreement are set out above.
7. Other
Other problems that should be dealt with include
Privacy procedure,
Arbitral trials,
There is no alliance,
Allocation of rights and
Conflict with the terms of the Association of the Company

 Five Important Clauses to Include in Your Shareholders' Agreement

Share Vesting Clause.
Pre-emptive Rights and Right Of First Refusal Clause.
Special Rights to Appoint Directors and Super-Majority Clause.
Non-competition Clause.
Deadlock Resolution Clause.

 Typically, a shareholder’s agreement should include clauses such as these:

1.Who is a shareholder in the company
2.Dilution rights
3.Intellectual property assignment
4.Shareholdings and classes of shares for each shareholder
5.Compulsory transfer of shares in the event of a tragedy
6.Voting powers
7.Dividend policies (startups generally have no dividend policies)
8.Responsibilities
9.Reverse vesting provisions
10.Pre-emptive rights

 CONCLUSION : One must understand the need for a shareholder agreement, and why it is
important to strike a balance between the interests of the shareholders and the interests of
 the company .Do not make the words vague, but keep them correct, which restricts the
interpretation of the words. Broad interpretations are creating problems in the long run.It
is clear that the rights and obligations of both parties – i.e. shareholders and shareholders
– are specified. Some of the major benefits of a shareholder agreement can be
summarized as follows:
•When the parties enter into business, there is usually a lot of trust and goodwill between the
shareholders at the outset. All parties are looking for a successful business, and often little
attention is paid to what would happen if there were a difference of opinion. Also, a lot of
discussions
•By having specific discussions on what to do with the shareholder agreement, it focuses on the
minds of parties who may not have previously thought about addressing specific scenarios.

•In contrast to the articles of association, the shareholder agreement is a private document that
can be of benefit to the parties , especially if there are very sensitive commercial details that need
to be included. Without a shareholder agreement, in the event of a dispute or a breach of trust
between the shareholders, there will be no agreement on how to resolve the dispute or on how to
terminate the relationship between the shareholders (other than the statutory provisions and the
terms set out in the articles of association).
Without a shareholder agreement, in the event of a dispute or a breach of trust between the
shareholders, there will be no agreement on how to resolve the dispute or on how to terminate
the relationship between the shareholders (other than the statutory provisions and the terms set
out in the articles of association).If all shareholders approach the problem in a fair and
reasonable manner, a solution may be documented and all parties may be able to move forward
happily. However, when shareholders have dropped and are no longer on the talking terms,
negotiations to agree a separation may prove stressful, time-consuming and costly. In addition,
disputes over company assets, repayment of loans and share prices are more difficult to resolve,
particularly in smaller companies where directors and shareholders work full time in the
company and shareholdings are held on an equal footing. This situation is known as a deadlock,
and without a mechanism to decide on a deadlock, the parties may need to consider winding up.
The terms of the shareholder agreement and the articles of association of the company are very
much tailored to the company's share and management structure and the company's future plans.
Agreements are not "one size fits all" and receiving advice that is appropriate to the
circumstances of your company is imperative to avoid creating more problems than the
agreements solve .We can negotiate and draught on your behalf all terms of the shareholders'
agreement and articles of association. We have extensive knowledge and experience in drawing
up simple and complex agreements and articles to meet your needs. Getting the right legal advice
at the right time can help keep your business running smoothly in order to achieve long-term
success.
An examples of a shareholder agreement;
1.https://www.pandadoc.com/shareholder-agreement-template/
2. https://www.sfu.ca/~mvolker/biz/agreesmp.htm
3. https://templatelab.com/shareholder-agreements/