In today’s professional world where conflicts and disagreements are very common entrepreneurs suffer from uncertainty and confusions about their rights and duties. In fact, day in day out we become witness of costly legal battles among the co-promoters or the investors and the founders on who shall be the decision maker in the organisation. This is where a Shareholder’s Agreement or SHA in short can help.

A shareholder’s Agreement or a Share Subscription Agreement is a written arrangement which clearly outlines the rights and obligation of the parties. This helps in providing a clearer outline on how the decision making process in the organisation will work.

 

There is an English Proverb which says- “Better a lean agreement than a fat lawsuit.” Likewise a Shareholder’s Agreement can save the stakeholders to the agreement from the possibilities of potential conflict as the agreement shall help in to create clarity and confidence in the decision making process of the organisation.

 

Some of the main clauses in a well drafted Shareholder’s Agreement are-

 

1. Tag Along Rights- It forces the Seller of the shares to make arrangement where the buyers have to buy the shares of other shareholders. This helps to protect the rights of Minority shareholders.

 

2. Anti Dilution Clause- This helps to save the interest of the Investors where if dilution takes place the promoters will compensate the Investors by transferring their own shares in requisite amount to the Investors in nominal amount.

 

3. Director’s Appointment- It can force the present shareholder to appoint a director from the Investor’s side in the board. This shall give a greater representation of the new shareholder in the operation of the Board.

 

4. Indemnity Clause- Through this clause the proposed directors of the new shareholder can be indemnified for the decision which was not taken by him/ taken before him.

 

5. Lock in Clause- Through this clause the Shareholder cannot sell his/her shares until and unless he remains a shareholder for a stipulated duration. This protects the shareholder from incorporating others in the company and structure of the company remains lean and strong.

 

6. Dispute Settlement Mechanism- Through this clause Dispute can be effectively settled. This clause helps to outline the procedures of how any type of disagreements among the parties can be resolved.

 

The Benefits of having a Shareholding Agreement are many folds. Some of them are-

 

1. Many a times it is seen that the Articles of Association is silent on some aspect. However, the Shareholder’s Agreement can contain the arrangement and the clauses which can help to bring an workable solution.

 

2. Through such agreement we can provide greater power in the hands of Minority stakeholders. Through this Agreement we can accommodate necessary clauses which will force the company to take the Approval of the minority stakeholders in important decision making process.

 

3. The Articles are usually a public document whereas the SHA is a private document. We need not file the SHA to the Ministry and hence it is not for public scrutiny. This helps us to make private arrangements among the parties of the company without going through the procedure of filing the same.

 

4. There can be clauses incorporated in the SHA where it makes sure that if the Shareholder (who is also an employee of the organisation) does not perform to the expectancy of the Management or leave the organization before a said duration then he/ she has to transfer its share to the promoters of the organization. This helps the company to retain talent.

 

5. It also helps to minimize any type of business dispute. A well drafted Shareholder’s Agreement outlines the different circumstances where dispute can arise and the resolutions for the same. It also specifies the Arbitration/ Conciliation Authority who shall be responsible if any other dispute arises. Hence, through a SHA the shareholders can not only settle any disagreements easily but also cheaply.

 

6. A good SHA is a facilitator of Investment. It shows the Investor that the promoters are serious about their business and they are willing to perform proper corporate governance practice in their organisation.

 

 

7. The Clauses in the SHA can protect the parties from dilution its stake. The Agreement with necessary clause can force the promoters to transfer his/her share in case of any type of dilution takes place.

 

8. Clauses like Lock in/ Drag Along/ Tag Along/ Indemnity helps the parties to protect itself from any type of financial irregulaties or any type of undue advantage claimed by any party to the agreement.

 

 

All together it can be said a well drafted Shareholding Agreement can not only save the stakeholders from incurring high fees to resolve their disputes but also create a mechanism where the stakeholders of the organisation can understand their rights and duties and perform for the best interest of the company.

 

For SHA and Funding visit taxmantra.com.

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