Shareholder’s Agreement: Meaning, Contents & Purpose
Every company issues some shares to investors to raise non-debt capital, which reduces the promoters’ or founders’ overall holding. All stockholders are subject to the different terms and conditions outlined by the company.
A company records the terms of the sale/issuance of shares to investors through a shareholder’s agreement. It functions as a legal contract between shareholders and the company issuing shares. It protects the interests of both shareholders and companies issuing them.
Let’s look into the various intricacies of this concept.
What Is a Shareholder’s Agreement?
As already discussed, it is a mutual legal contract between shareholders and issuing companies. It defines or formulates relationships between them by clearly describing the rights and obligations of a shareholder. Apart from this, it also deals with the issuance of shares, the functioning of the business issuing such shares and the decision-making process.
Now that you know the meaning of shareholder’s agreement let’s shift our focus to other intriguing aspects of this concept.
What Is the Purpose of a Shareholder’s Agreement?
Here are some reasons that depict the real purpose of having such agreements:
- It helps in clearly restricting every shareholder’s rights, responsibilities and obligations.
- Shareholder agreements serve as a structure for all the significant decisions that the company has taken or will take.
- Moreover, this legal contract also contains information about a company’s operations. It also establishes roles played by every shareholder.
- The terms and conditions mentioned in these agreements are applicable when buying or selling securities. All trading transactions should occur as per regulations and terms mentioned in that particular shareholder agreement.
- One of the major reasons to have a shareholder agreement to maintain the working of the company and the shareholder. If there is any dispute between the two, mediators or courts can refer to this contract and arrive at a dispute resolution.
What Are the Contents of a Shareholder’s Agreement?
Some of the contents of this agreement are as follows:
The first segment of a shareholder’s agreement defines the various parties involved. The two parties that are lucidly defined are the company and corresponding shareholders.
Board of Directors
A shareholder agreement also contains information about the board of directors and the role played by them. This agreement also mentions how the board should meet along with the method of election and replacement of board members. Rights of shareholder to appoint nominee director on board.
This agreement also defines all important matters that should be passed only after the approval of all the concerned signatories. It also specifies that every shareholder has a right to review every transaction that a company initiates to see whether it negatively influences their interests.
However, some matters remain withheld in this agreement, which include the purchase or sale of some assets, payment of dividends, acquisition of new liabilities, changes in the structure of capital, etc.
Another important component of this agreement is that it contains information about shareholder’s meetings, i.e., the frequency of such meetings that the company is liable to hold. Apart from this, it also mentions that shareholders have a right to access the company’s financial accounts.
Every company brings out some report specifying the status of its financial health on a quarterly, half-yearly or annual basis. Shareholders have an unfettered right to access such reports. Moreover, this agreement also includes timing, dates and place of shareholders’ meetings.
Share Capital and Transfer
This agreement also outlines a company’s authorised capital requirement when signing such contracts. In addition, these agreements have separate provisions regarding share transfer in specific circumstances like the death or resignation of the shareholder.
Finally, shareholder agreements also contain a separate provision specifying in greater detail the termination process and amendment of these contracts.
A shareholder’s agreement is one of the most important documents that contain various terms and conditions which define the relationship between a company and its shareholders. In addition, this contract governs the procedures for resolving disputes, and parties must abide by the settlement process.
It is important for every shareholder to carefully analyse the agreement they are signing, as all future courses of action depend on that piece of paper.
Frequently Asked Questions (FAQs)
What are the advantages of having a shareholder’s agreement?
Some major advantages of shareholder agreements are the establishment and recognition of authority, safeguarding interests of minority investors, clearly restricting the role of parties and providing a way for resolving all disputes.
What are various clauses in a shareholder’s agreement?
The various clauses in a shareholder’s agreement are the responsibilities and duties of a shareholder, addressing questions of importance, restrictions on the transfer of shares, period of assigning shares, etc.
How do shareholder agreements protect minority shareholders?
A minority shareholder lacks any effective powers as they do not enjoy voting rights. The articles of incorporation have some provisions for the protection of minority shareholders, but companies can easily amend their charter by a simple majority.
In this scenario, a shareholder’s agreement is effective as it enforces certain restrictions and grants some special rights to minority investors.
Can a shareholder’s agreement be legally binding?
Yes, a shareholder agreement signed by both parties is legally binding and is enforceable in a court of law. However, such agreements are not binding on any third party.