A shareholder’s agreement is a contract between the company and its shareholders. It outlines the rights, obligations of the shareholders and provisions related to the management and the authorities of the company. The purpose of the agreement is to protect the interests of the shareholders; especially minority shareholders i.e the ones holding less than 50% of shares in the company.
Shareholder’s agreement generally consists of the provisions related to the shareholder’s rights with respect to the following matters:
1. Rights of a shareholder
As a shareholder, a person is entitled to certain rights with respect to the company. Some of them are:-
2. Regulations with regard to sale and transfer of the share of the company
When it comes to the issue of transfer of shares, to protect the interest of the shareholders, there are certain rules put in place so as to ensure that such transfer happens only upon receiving the consent of the parties involved.
3. Financial needs of the company
As the shareholders are given copies of the financial statements, they are able to track the progress and the needs of the company. In the event where the shareholders find the need for an influx of funds which they think will be beneficial to the growth of the company, they will then discuss the most lucrative source of funding and then proceed towards obtaining it. The procedure for obtaining such finances are laid down in the Shareholders Agreement.
4. Requirements with respect to a quorum
A quorum refers to the minimum number of members required for a meeting to be considered as a valid meeting. The requirements with respect to a quorum will be clearly mentioned in the Shareholders’ Agreement.
5. Valuation methods for the shares of the company
As the market is prone to constant fluctuation, the value of the company shares varies too. However, in order to aid in the proper preparation of the financial statements, the method of valuing the company’s shares also plays a significant part and has a material impact on the financial statements. The methods of valuation include:-
6. The manner in which the company will be run
In order for there to be smooth and free-flowing operations, there must be certain policies and procedures set in place. The Shareholders’ Agreement contains the guidelines with respect to how the company will be run on a day to day basis so as to ensure consistent and uninhibited workflow.
7. Liabilities of a shareholder
The reason behind the limited liability of the shareholders boils down to the fact that the company is a separate legal entity, hence separate from the shareholders.
8. Protection of minority shareholders
Minority shareholders are those who do not enjoy much in terms of powers when it comes to the management of the company. Since the introduction of the Companies Act, 2013, the rights of the minority shareholders have been given importance.
