A Shareholders’ Agreement is a legal document signed by the founders, promoters, and holders shareholders of a company. The document defines the relationship between these individuals.
It could be an agreement among all shareholders or holders of a particular class of shares.
While the Articles of a company are accessible to the public, the shareholders’ agreement is not.
The agreement states the rights and obligations of shareholders, regulates sales and transfer of shares, describes how the company is to be run and states how important decisions are to be made.
Why is a Shareholders’ Agreement Necessary?
It protects Shareholders’ Interest: It helps to protect the rights of shareholders, especially minority shareholders. The agreement might dictate what percentile of majority vote is required to take certain decisions that affect the interest of minority shareholders. The terms regulating this must be complied with. This way, the majority cannot impugn on the rights of minority shareholders.
Controls Share Transfer: Shareholder agreement provides for how shares are to be transferred or sold. It states whether shares should be issues at a discount, at premium or at nominal value. It states whether shares are to be sold to the public directly or to issuing houses. This prevents future disputes that may arise on sales and transfer of shares.
Conflict Resolution: This type of agreement usually provides for how conflicts among shareholders should be resolved. While Articles may leave disputes open, Shareholders’ agreement states the exact procedure for conflict resolution. This makes it possible to know how conflicts will be resolved even before they arise.
Fair Shareholders Relationship: It seeks to enthrone a fair relationship among shareholders. This is because founders, promoters, and shareholders usually predict all likely issues that might be encountered before such agreement is made.
This blog post sheds some light on the importance and benefits of signing a Shareholders’ Agreement.
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