Sunday, May 26, 2013

Overview of Share Holding Agreement

What is Share Holder Agreement
A shareholders agreement is a written agreement between the shareholders or partners of a business; it is ground rules of the relationship between the shareholders.

Indian Law and Share Holder Agreement
Shareholders’ agreements are not mandatory under Indian law. Shareholders’ agreements are binding only on the parties to the shareholders’ agreement and as it is a contractual arrangement between the parties

Benefits of a Shareholders' Agreement
It is a commonly use mechanism to regulate avoiding any disputes over the running of a business and its funding.

Main provisions, Clauses and Outline of Share Holding Agreement

 Parties to Agreement
The parties to a holders' Agreement are the shareholders of the corporation. Ideally, all holders will participate in the holders' Agreement.

Definitions and Interpretation Clause
To avoid any misinterpretation or minimize the dispute over a particular point, it is better to have definitions and interpretation clauses, which provide a straight and clear meaning, and in what manner it shall be interrelated of any word or phrases used in the agreement.

Structure of the senior executive team 
This clause defines the board of director, the size of the board, right and liability, restrictions on board, meeting of the board etc. 

Restrictions against Transfer
A provision that prohibits one of the shareholders from selling, transferring, or encumbering shares without the prior written consent of the other shareholders.

Right of First Refusal
This is an agreement between the existing shareholders whereby the shareholder wishing to sell to a third party must first offer the shares to the holder of the first refusal right. Rights of first refusal protect the Company and non-selling shareholders from sales of stock to unfriendly parties or competitors.

Buyout Rights
These give the company the right to redeem the shares of a certain shareholder in specific circumstances, such as withdrawal or death of the shareholder.

Purchase Price
A Shareholders Agreement will generally include some formula for valuing shares purchased. These formulas vary from fair market value determined by one or more appraisers, to book value, or no value, depending on the situation.

Valuation of Shares
The valuation of the Shares of the Company required to be determined under applicable Law in accordance with the method prescribed under the relevant regulations and notifications issued under.

Co-Sale Rights
These provisions can require that the price offered by the third party must exceed a certain threshold before the shareholders have the obligation to sell.

To secure due performance of their obligations, with an escrow agent to be mutually agreed between the Promoter and Investors

The Promoters agree shall not, without the prior approval of the Board and prior written approval of the Investors, directly or indirectly, including through an Affiliate or nominee, engage in or be involved in any business or commercial activity other than the Business of the Company. 

The Company and the Promoter agree to jointly and severally indemnify, defend and hold harmless the Investors, respective Affiliates of the Investors, and their respective directors, officers, representatives, employees, managers and members  from and against any and all Losses.

The Parties agree to negotiate in good faith to resolve any dispute between them relating to the Transaction Documents.

In companies where shareholders have different business interests, some being more active than others in the company, it is essential to include confidentiality clauses so as to protect the company from the release of commercial information to competitors or other outsiders.

Other General Provisions

Notice to other party how and in what manner it would serve, where and to whom it would serve, in case of dispute arises.

Entire Agreement
To prevent the parties to a contract being liable for statements or representations, made in the context of contractual negotiations, which are not incorporated into the agreement.The purpose of such clauses is clear - as a matter of commercial certainty, it is desirable that the entire agreement between the parties be contained in one easily accessible document.

Governing Law and Jurisdiction
In case of any dispute what laws are applicable and what would be the jurisdiction.

Effective Date
No Objection


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