COMPANY LAW

Share holders agreement:

Jurisprudential basis and
impact

P
ROJECT BY:
T.R.SUDARSHAN

B
A.LLB(HONS.)
S
EMESTER-V
TABLE OF CONTENTS
S.N
Contents
o
1. Introduction
2. Share holders agreement
3. Characteristics of share
4.
5.
6.
7.
8.

holders agreement
Objects of share holders
agreement
Types of share holders
agreement
Advantages of share
holders agreement
Disadvantages of share
holders agreement
Impact of share holders
agreement on minority

Pag
e No

3
5
8
9
10
11
12
13

share holders
9. Impact of share holders
agreement on majority
share holders
10. Conclusion
11. Bibliography

15

INTRODUCTION:
To put simply a
shareholders agreement is essentially a contract
between some or all of the shareholders in a
company and frequently the company itself. The
basic purpose of a shareholders agreement is to
provide how the company is to be managed and,
as far as possible, to prospectively address issues
that might otherwise become divisive in the future
if not agreed in advance. Certain important points
flow from the basic fact that a shareholders
agreement is a contract which I will deal with a
little later on.

When setting up a
company with family or friends it is easy to assume
that nothing can go wrong in the future. You might
assume that as you trust one another you do not

need to put in place something like a shareholders

agreement in fact, you might think that asking for
a shareholders agreement will make it sound like
you do not trust or respect your new business
partners. Hopefully nothing will go wrong in the
future. However, even family members and best
friends fall out and, if the worst should happen, you
could then end up with nothing. Or you might face
the breakdown of a friendship alongside a costly
and acrimonious legal dispute related to the
business.

Although the companys

articles of association will help to some extent, a
fully considered and well drafted shareholders
agreement can act as a safeguard and give you
and your fellow shareholders more protection
against these types of scenario. Although some
people with a shareholders agreement will never
need to rely on its terms, there will be many more
cases where shareholders wish they had taken the
time to put a proper agreement in place. If you are
going into business with others and are looking for
confidence about your future relationships with
them, you should carefully consider putting a
shareholders agreement in place to protect both

the business enterprise and your own investment

in the company.

The most important purpose

of a shareholders agreement is to set out the
expectations of each of the parties to the
agreement. A well-drafted agreement sets out
clear rules that define the relationship between the
shareholders and precisely outlines how the
corporation will be controlled and managed. A
shareholders agreement can also serve as a useful
tool in dispute resolution. If a disagreement arises,
the shareholders agreement can be used to either
settle the matter or provide a procedure for quick,
inexpensive resolution of the matter.
A shareholders agreement can
prescribe how the shareholders will vote. This is
important, because without an agreement, the law
allows shareholders to vote in their own best
interests. Another function of a shareholders
agreement is to control who continues to be a
shareholder and to place restrictions on new
shareholders coming into the corporation.

SHARE HOLDERS AGREEMENT:

The share holders agreement is a
Contract between the owners (shareholders) of a
company, defining their mutual obligations,
privileges, protections, and rights, and usually
comprising the firm's articles of association or
bylaws.
Although
a
properly
constituted
shareholders' agreement protects all signatories,
its provisions typically are more important to
minority shareholders (holding less than 50 percent
of the voting shares), such as those which stipulate
the power of minority shareholders to (1) demand
internal accounts for inspection, (2) force the firm
to pay a dividend if there are profits, (3) sell their
shares to other shareholders at a fair market value
(FMV), (4) formula or method of determining FMV,
and (5) method of settling disputes over FMV. It
ensures that there is a market for the shares of a
shareholder whose association with the company is
terminated for whatever reason, and safeguards
the interests of the continuing shareholders from
the possibility of outsiders taking control of the
company.
A shareholders agreement can
be between all or, in some cases, only some of the

shareholders (like, for instance, the holders of a

particular class of share). Its purpose is to protect
the shareholders investment in the company, to
establish a fair relationship between the
shareholders and govern how the company is run.

A Shareholders agreement is a
private contract between the fellow shareholders
containing the rules for running and owning the
company.In its most basic form it is similar to a
simple partnership agreement but for a company
instead.
It will usually deal with specifying
respective ownership of shares and with
shareholder/director's authority levels for making
company decisions such as when the business and
assets of the company can be sold. There is no
standard form of Shareholders agreement so they
are flexible to fit the needs. Shareholders
Agreements can specify that further agreements
will
be
entered
into
between
individual
shareholders and the company such as: directors
service agreements (employment contracts),
transfer of business premises to the company,
supply agreements to or from the company,
management
agreements
or
technology
agreements (e.g.IT or IP transfers or licences,

Patents, Trademarks, Copyright or Software

agreements). This ensures that all necessary legal
arrangements are put into place at the same time,
for your protection/the protection of the business.

Shareholders Agreements closely

relate to the companys Articles of Association. All
companies have Articles of Association but
companies are not legally required to have a
Shareholders Agreement. Articles of Association
are filed at Companies House when the company is
first formed and they set out the administrative
and company law procedures affecting your
company. Importantly they should set out the
classes of shares and the rights to vote, dividend
entitlements and return of capital on a winding up
of the company. Some issues that can be dealt
with in a Shareholders Agreement could instead be
included in the Articles of Association and vice
versa. The Shareholders Agreement is a private
document and not a public document.

CHARACTERISTICS OF SHARE
HOLDERS AGREEMENT:
Common characteristics of Shareholders'
agreements obviously vary enormously between
different countries and different commercial fields.
However, in a characteristic joint venture or
business startup, a shareholders' agreement would
normally be expected to regulate the following
matters:
Regulating the ownership and voting rights of
the shares in the company, including Lockdown provisions restrictions on transferring
shares, or granting security interests over
shares pre-emption rights and rights of first
refusal in relation to any shares issued by the
company (often called a buy-sell agreement).
"tag-along" and "drag-along" rights, minority
protection provisions, control and management
of the company, which may include power for
certain shareholders to designate individual for
election to the board of directors imposing
super-majority
voting
requirements
for
"reserved
matters"
which
are
of
key
importance
to
the
parties
imposing
requirements to provide shareholders with

accounts or other information that they might

not otherwise be entitled to by law making
provision for the resolution of any future
disputes between shareholders, including
deadlock provisions .
dispute resolution provisions protecting the
competitive interests of the company which
may include restrictions on a shareholder's
ability to be involved in a competing business
to the company restrictions on a shareholder's
ability to poach key employees of the company
key terms with suppliers or customers who are
also shareholders.

In addition, shareholders agreements will

often make provision for the - the nature and
amount of initial contribution (whether capital
contribution or other) to the company, the
proposed nature of the business how any
future capital contributions or financing
arrangements are to be made, ethical
practices[8] or environmental practices and
allocation of key roles or responsibilities.

OBJECT OF SHARE HOLDERS

AGREEMENT:
The share holders agreement aims to
set
out
the
shareholders
rights
and
obligations;
regulate the sale of shares in the company;
describe how the company is going to be run;
provide an element of protection for minority
shareholders and the company; and
define how important decisions are to be
made.
The shareholders agreement give
specific,
important and practical rules relating to the
company and the relationship between the
shareholders. This can be beneficial both to
minority and majority shareholders.

TYPES OF SHARE HOLDERS

AGREEMENT:

 Pre-incorporation/formation agreement a share

holders agreement put in place between the
parties who intend to form a company and to be its
initial shareholders;
Subscription and shareholders agreement - a
shareholders agreement entered into between
parties
who
are
subscribing
for
shares
contemporaneously with the entry into the
shareholders agreements;
Shareholders agreement governing a 50:50
shareholding position (or where there are other
equal minority shareholdings);

Shareholders
agreement
majority/minority situation;
Shareholders agreement
venture situation.

governing

governing

a
joint

these above mentioned are the most common

categories of situations where shareholders
agreements are used .

ADVANTAGES OF SHARE
HOLDERS AGREEMENT:

Privacy
The predominant reason for using a shareholders
agreement is that it is a private document between
the parties thereto which can be made subject to
express confidentiality restrictions. By
contrast the articles of association are a public
document available for inspection by members of
the public in the Companies Registration Office.
This makes the articles of association an unsuitable
means for dealing with matters such as, for
example, the remuneration of directors or other
sensitive internal management matters.
Greater Binding Effect
As explained above articles of association can only
bind a shareholder in his capacity as shareholder.
By contrast shareholders agreements may be used
to give rights and impose obligations on
shareholders e.g. binding a person in his capacity
as director or as a creditor or agent. However one
needs to be very careful in imposing obligations on
a party in his capacity as a director.

Variation
The articles of association can be amended by way
of a special resolution. By contrast, unless a
shareholders agreement expressly provides for a
specific variation mechanism ,or it can only be
varied by unanimous agreement of the parties
thereto.

DISADVANTAGES OF SHARE
HOLDERS AGREEMENT:
Binding Effect
Because of its nature as a contract a shareholders
agreement only binds the parties thereto and does
not automatically bind all shareholders. Therefore if
a party transfers his shares the transferee will not
automatically be bound by the terms of the
shareholders agreement. To circumvent this it is
normal to provide in a shareholders agreement
that an existing shareholder who is party to a
shareholders agreement can only transfer his
shares if he procures that the transferee enters into
what is known as a deed of adherence which joins
the transferee as a party to the shareholders
agreement.

Interpretation
Again as shareholders agreements
are contracts they are subject to the ordinary rules
of contract law, in the event a dispute arising as to
the meaning of a provision in the shareholders
agreement, a court would, as a primary means of
interpretation, seek to establish what was the
intent of the parties based on the wording of the
contract.
By contrast the language in articles
of association has become in many respects fairly
standardized and many of the provisions used in
articles of association have been judicially
considered over the years and there may therefore
be available judicial precedent to assist in the
interpretation of those provisions.

IMPACT OF SHARE HOLDERS

AGREEMENT ON MINORITY SHARE
HOLDERS:
Without a shareholders
agreement, a minority shareholder (one owning
less than 50% of the shares) will on their own have

little control or say in the running of the company.

Indeed the control will often rest with one or two
shareholders. Companies are generally run by
majority decision and even if the articles of
association include provisions that protect the
minority these can be changed via special
resolution by holders of 75% of the shares. There
are laws that provide limited protection to minority
shareholders but these can be costly to enforce
and may not achieve the required redress.

Being a minority shareholder

and having a shareholders agreement that
includes the requirement for all shareholders to
approve certain decisions ensures that you have a
say in the important decisions that impact the
company. This could be decisions on the issue of
new shares, appointment or removal of directors,
taking on new borrowings or changing the main
trade. However, if the shareholders agreement
requires all decision to be unanimous this could
cause problems and ultimately prevent your
company carrying out its business.

As a minority shareholder you

may want a provision included that if someone is
willing to buy the shares of a majority shareholder,
that shareholder can only sell the shares if the
same offer is made to all shareholders including
you as a minority shareholder. This is often referred
to as a tag along provision. This share holders
agreement ensure that you receive the same
return on your investment as the other
shareholders.

IMPACT OF SHARE HOLDERS

AGREEMENT ON MAJORITY SHARE
HOLDERS:
If as the majority shareholder you
want to sell your shares but a minority shareholder
is unwilling to agree then including a provision
forcing that shareholder to sell their shares is
important. This is often referred to as a drag
along provision. This will then allow to realize the
investment at a time and price that we feel is
appropriate.
Obviously the price and other
payments for the sale will need to be fair for all
shareholders, including the minority shareholders.

In addition you would want to

prevent
minority
shareholders
passing
on
confidential company information to competitors or
setting up rival businesses, each of which can be
included as a provision within a shareholders
agreement. Another concern is where one of your
fellow shareholders could transfer their shares to
anyone. This could cause problems for you and the
other shareholders, especially if the sale is to a
competitor or someone else you do not want
involved with the company. Conversely, however,
to force an unhappy shareholder to stay may cause
more problems than having a new unknown
shareholder who is interested in the company
being successful. You and your fellow shareholders
need to get on with each other for the business to
thrive. To overcome these problems, shareholders
agreements will often include rules around share
sales and transfers who shares can be transferred
to, on what terms and at what price. Thus the
share holders agreement has impact on the
majority share holders too.

CONCLUSION:

BIBLIOGRAPHY: