Understanding Shareholder Key Provision in a Shareholder Agreement

Shareholders are regarded as the company's true owners. The Shareholder's Agreement is a contract between the company and its shareholders that describes the rights and obligations of each party.

Why do we need a Shareholder’s Agreement?

A shareholder agreement is signed in order to settle any disagreements between the shareholders and the company. We can't be certain that nothing will ever go wrong, and in cases where nothing is certain, such agreements assist us in resolving disputes and maintaining a healthy relationship between shareholders and the company.

It also protects a shareholder's investment and establishes the rules and regulations for shareholders and any other party associated with the company.

A shareholder agreement must be regulated because no two shareholders are the same. An agreement must be written with the understanding that each individual is unique and has a different perspective on the subject or matter at hand. And they might or might not agree with each other.

Importance of shareholder agreements

This agreement is signed in order to maintain a smooth regulatory relationship between the company and its shareholders. It safeguards the rights of the company's majority and minority shareholders. In the absence or neglect of a properly drafted shareowners agreement, the chances of disputes are high, and there will be no uniform regulation of the rights and duties of the company's shareholders.

In such cases, it is difficult to reach an amicable solution, which is detrimental to the company. When it comes to startup funding, it is always a good idea to draught a well-thought-out startup shareholder agreement as you bring on new investors.

The Shareholder's Agreement's Key Provisions

The following are the basic provisions of a shareholder agreement:

• In what proportion a shareholder is going to hold the shares?
• Will there be the different class of shares for different category of shareholders (comprising of minority, majority & founder shareholders)
• If there are the new issue of shares in the market should the existing shareholders get the privilege of getting those shares first?
• Can the board of directors stop the issuance of any such share or can they stop the transfer of shares?
• What are the rules for transferring of shares?

Consent of Shareholders

It includes circumstances and situations in which the consent of the majority shareholder is required. For example, in the following cases, a shareholder's consent will be required:

• When a member, such as a manager or a member of the supervisory board, is appointed or dismissed, the consent of shareholders is required.
• Whenever a financial statement is being prepared or a dividend is being distributed.
• When the company wishes to amend its articles of incorporation.
• When entering into amalgamation or filing for bankruptcy.
• When dissolving the company.

An example of a consent clause is as follows:

1. Resolving Disputes

It would be very modest to claim that there will be no disagreements when investing in a company. As a result, the company must also be prepared for such events. A dispute does not only refer to internal disagreements; it also refers to disagreements with a competitor or rival company.
Companies typically choose out-of-court settlements such as arbitration or conciliation between the company and shareholders to resolve shareholder disputes.

2. Right of first refusal (ROFR)

This right essentially shields the company and its existing shareholders from stock sales to a competitor or other parties with whom the company does not have friendly relations. When some shareholders wish to sell their shares, a clause in the shareholder agreement should state that the shareholders who wish to sell their shares must demonstrate the right to match a third-party offer. This is referred to as the right of first refusal.

3. Buy-out Rights

The Shareholders' Agreement must include a clause stating that if a shareholder is found incompetent due to certain major events, such as death, disability, bankruptcy, or marital dissolution, the company or existing shareholders can buy such shareholder's shares. It also includes a "expulsion" clause, under which existing shareholders can expel any unfavorable shareholder and acquire his or her shares.

Things to be kept in mind while drafting a Shareholder’s Agreement

• One must comprehend the significance of a shareholders' agreement, including why it is necessary to strike a balance between the interests of shareholders and the interests of the company.
• Don't make the terms ambiguous; instead, keep it precise, limiting the terms' interpretation. In the long run, broad interpretations cause problems.
• Clearly define both parties' rights and obligations, i.e. shareholders and the company.
• Keep in mind that there is a good chance a shareholder will want to leave; clauses governing this process should be clearly laid out.
• Dispute resolution clauses should be clearly defined, particularly with regard to the following points: mode of dispute resolution, location of such dispute resolution, powers and duties, and so on.
• Restrictions on transfer of shares should be clearly defined and the process for the same should be laid out.

The preceding are just a few considerations. Contact a professional for a more detailed analysis who can assist you in writing one.

FAQ on Shareholder Agreement

Here are some common questions and answers about shareholder key provisions:

Q: What is a shareholder key provision?

A: A shareholder key provision is a clause in a company's articles of association or shareholder agreement that allows shareholders to appoint a key person or group of key persons who have the power to exercise certain rights or control certain actions on behalf of the shareholders.

Q: What are the main purposes of a shareholder key provision?

A: Some of the main purposes of a shareholder key provision include:

• Providing a mechanism for shareholders to exercise their rights collectively, rather than individually.
• Allowing shareholders to appoint key persons who have the knowledge and expertise to make decisions on their behalf.
• Giving shareholders a degree of control over the management and operations of the company, without the need to hold a majority of the shares.
• Protecting the interests of minority shareholders by allowing them to have a say in important decisions.

Q: Can a shareholder key provision be amended or terminated?

A: Yes, a shareholder key provision can typically be amended or terminated by agreement of the shareholders. However, the specific process for amending or terminating the provision may be subject to the terms of the provision and the applicable laws. It is important for shareholders to carefully review the provision and seek legal advice if necessary.

Conclusion

A shareholder agreement is a mechanism that protects the company's interests and saves it from losses. Every shareholder agreement must include the key provisions listed above in order to strike a balance between shareholder and company interests.

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