Shares represent the part ownership of the company. An investor exchanges his capital to acquire equity/holding in a company. The individual/entity holding these shares is known as the shareholder. A shareholders agreement is a legally binding agreement between the shareholders of the company that lays down the rights and obligations of the shareholders towards each other as well as the company. It is a definitive agreement which as a part of it sometimes also includes the SSA (Share subscription agreement) and SPA (Share purchasing agreement).
The purpose of the agreement is to safeguard both the business entity and the shareholders’ investments. Due to the fact that it ties the shareholders to the established connection, it is also known as the “Stockholders Agreement”. It is an essential agreement that addresses the issues that might lead to disagreement or require clarification in the future. A shareholders agreement is not mandatory in the Indian law but it is binding in nature as it is a contractual agreement.
The shareholders agreement begins with the details of the parties i.e. the shareholders along with the number and percentage of shares issued to each shareholder, it also lists the type of share issued to the individual/entity and the rate at which dividend is to be paid.
The agreement includes all the details relating to any restrictions on transferring of shares. It outlines the business’s operating procedures and how important decisions will be made. It contains important provisions like the Pre-emptive rights of shareholders, Constitution of the board of directors, Anti-dilution clause, Tag-along and Drag-along rights, Non-compete clause, Exit rights and much more. A shareholders’ agreement is an elaborate and legally binding format of the term sheet.
A shareholders’ agreement may protect minorities of shareholders. One approach is to use the provisions indicating that certain decisions need to be unanimous. The decision will not be implemented as long as one shareholder is opposed to it, regardless of how much stock that shareholder holds in the company. Minority shareholders are those who possess less than 50% of a company’s stock. Since the majority often controls most organizations, minority shareholders typically have little impact on the company. The rights of minority shareholders are guaranteed by law, but the protection is only limited because it could be expensive or challenging to enforce. A shareholders’ agreement is necessary to ensure clarity and less contention in the event of a dispute. However the agreement is optional, it is the only binding document stating the functioning of the company outside of the Articles of Association (AoA).
The primary distinction is that a shareholders’ agreement is a private contract, whereas the articles are a statutory necessity and a public record. In contrast to a shareholders’ agreement, where the parties have a legal need to comply and a breach by one party gives the other parties the right to sue the non-compliant party, the company is legally required to abide by its own articles.
As a part of the definitive agreements, alongside the Shareholders Agreement, either Share purchase agreement or Share subscription agreement is also included. A share subscription agreement is between a company and its investors. This agreement is specifically essential in case of a new issue of shares by the company, whereas the Share Purchase Agreement is an agreement that is drafted between the purchaser and buyer of the share. It is drafted when one of the shareholders of the company wants to sell his equity to another shareholder and wants to exit the company.