The start-up revolution in India started around 2008, just after the global recession that changed the facet of the entire country. Have you ever wondered, how was it for the board of directors and how Shareholder Agreement was structured? The global recession has led many companies to reallocate their resources, laying off many employees across the globe. Most of these employees were IT professionals aged 25-35 years, forming 65% of the total working population. The population in this group was going through speckled sentiments, whether fear of losing jobs, proving their mettle, breaking the fetters of mediocrity, and whatnot, which ultimately resulted in the start-up revolution, making India one of the start-ups friendly nations worldwide.
In the present situation, India boasts of having more than 6,000 start-ups, with approximately 44% being in Tier II and Tier III cities, making the country the second largest start-up ecosystem globally.
You must be aware that start-ups bring great expectations for every member, from the founder member to the shareholders, regarding the new business idea. Additionally, they strongly believe that the start-up is never going to fail. Well, many times the start-up owners fail to think about the future and ignore the anticipated situations that jeopardize them.
To avoid this kind of situation, it is important to have a shareholder’s Agreement as it can provide legal security for the company.
What is Shareholder’s Agreement?
A Shareholder Agreement is a contract between the shareholders of a company, which sets out their rights and responsibilities. Having one is not legally necessary, but it can be useful if there are disagreements between shareholders.
Shareholder’s Agreement is a document that outlines the ownership rights of shareholders in a company. It also defines the rights and responsibilities of the shareholders to each other, the company, and outside parties. It is a legal document that sets the terms and conditions for carrying out the company’s business. It is not a public document, so it does not have to be filed with any government authorities.
Typically, a Shareholder’s Agreement will divide up the shares in the company, set out how much each shareholder is responsible for paying towards running the company and what happens if someone wants to sell their shares.
Shareholders Agreements are also important for protecting minority shareholders from being unfairly treated by majority shareholders.
A shareholders agreement is important for any private limited company in India because it sets out who owns what shares in the company and how they can vote on decisions that must be made by the board of directors.
A Shareholders Agreement is a document that helps in the efficient management of a company. It helps to establish how shareholders take decisions and how they are communicated to other stakeholders.
Business enterprises must be goal driven as it always helps to manage the internal and external decisions relevant to the competitive market and stakeholders. Business decisions are always complicated, especially in a dynamic country like India. In such cases, when the going gets tough, the tough needs to get going, which is only possible by undertaking decisions that help the business stakeholders to be in sync and work towards the common goal.
Shareholders Agreement plays an instrumental role as it clearly mentions the roles and responsibilities of each party involved in the business. It helps smoothen the operation and helps the business grow without any internal disputes focussing on the common objective. Because, in the end, it is more important to prevent any potential disputes that may rise in business decisions.
What is the need to have a Shareholders’ Agreement?
A Shareholder Agreement is an agreement between a company’s shareholders to regulate the relationship between them. It can be used to regulate the relationship between the shareholders and other people such as employees, creditors, or the government.
It can also be used to regulate the relationship between different class shares, for example, if some shares have voting rights and others don’t. It can also be used between the majority shareholders and the minority shareholders.
The Agreement may also provide a method for resolving disputes among shareholders.
Shareholder Agreement for a private limited company in India is important as it can be used to predict certain aspects that can affect the company’s performance. Nevertheless, the shareholders’ Agreement is not the only “saving grace” to prevent the companies from problems but it helps to identify the solutions to these problems and undertake appropriate actions.
What are the advantages of having a Shareholder’s Agreement?
Shareholder Agreement for a private limited company is crucial, unlike other companies. They protect the rights of all shareholders and make sure that the company is working for the benefit of everyone.
Shareholder Agreements can be used to resolve disputes between owners, regulate voting rights, and regulate how profits are distributed among shareholders. They can also be used to determine who controls specific aspects of the business such as hiring, investment, or management decisions.
The main advantage of having a Shareholder’s Agreement is that it protects all parties involved in the business from any potential disputes or disagreements about what should happen with their assets in case anything happens to them.
Why is there a need for a Shareholders Agreement?
Shareholders’ agreements in India can be divided into two categories: “shareholder-voting agreements” and “non-voting agreements.”
Shareholder-voting agreements are all about voting rights, which determine who has the right to vote on important matters in the company. They determine how much someone has to pay for their shares if they want to sell them, what happens if someone dies without leaving a will, and whether or not someone has the right to vote on certain matters. Shareholders with voting rights are the equity shareholders having the power to vote in every General Meeting of the company, whereas those with non-voting agreements are more about what happens to shares when someone leaves the company or dies.
Shareholders can also be categorized as “Majority” and “Minority” shareholders based on their stake in the company. The majority shareholders are the ones who have more than 51% in the company and the minority shareholders are those who jointly own less than 49% of the shares of the company.
It is a general observation that the majority of stakeholders always have a say in the company’s managerial decisions. If there is a dichotomy in the opinion of two shareholders, those with the majority always win. Similarly, there can be a contrary situation where the Minority shareholders may take a decision that the majority shareholders invalidate. In such situations, the Shareholder Agreement plays a vital role.
The Shareholder Agreement helps to have a better understanding between the parties and helps them to make decisions in favor of the business. The shareholder’s Agreement for private companies in India can help to protect the rights and interests of both – majority and minority shareholders.
Also, it is important that all the shareholders are on the same page and that is the reason for preparing the Agreement. The Agreement on the role of each party in the company can be mentioned on the shareholders agreement. Also, the consequential measures for each party on not meeting the obligations is provided in the shareholders agreement.
What should be included in the Shareholder’s Agreement?
The shareholder agreement is the foundation of a company. It includes how decisions are made, what rights and responsibilities each party have, and how profits are distributed.
The Agreement should include the following:
- The type of company (Sole Proprietorship or Single Person Company, Partnership Firm, Company)
- Rights & Responsibilities of each party
- Guidelines of how and to whom the shares of the companies are to be transferred or sold
- Ownership percentages
- Duties and responsibilities of each shareholder
- Decision-making process
- How profits will be distributed
- Business or share valuation methods of the company
- Rights of protection for minority shareholders
- Role of each shareholder in the decision-making process
Conclusion:
Final Words on the Importance of Having a Shareholders’ Agreement as Part of your Business Activities
Investors for start-up business are typically advised by their advocates to have a well-drafted shareholders’ Agreement as part of their business activities. The Agreement should be drawn up before the company is formed and should provide for the allocation of shares, voting rights, and other matters relating to the company’s management.
The shareholders’ Agreement is a key document in the start-up’s life. It sets out who owns what and how that ownership will be transferred. It also determines how decisions are made, who has decision-making authority, what happens if there’s a dispute among shareholders, and whether or not any shareholder has veto power over decisions.
Shareholder’s Agreement are signed while setting up the business or maybe prior to the Agreement of the business. However, it is never late to enter into a shareholders agreement as far as it is concerned to meet the objectives of a business, avoid disputes among the shareholders, stabilize the business and protect the rights of the shareholders.
