A Shareholders' Agreement is an agreement amongst the shareholders of a company. When a company is created, its founding shareholders determine how a company will be owned and managed. The Shareholders' Agreement establishes rules to govern the relationship between two or more owners of a company. Without a shareholders’ agreement in place, the rules that apply are in the applicable corporate statute. The shareholders’ agreement creates an overlay that addresses issues created or left unanswered by the corporate statute; they work together to create the rules that govern the relationship between the shareholders. In many cases, the structure protects the basic economic interests of the shareholders more effectively than the corporate statute does on its own. A Shareholders’ Agreement provides details of the rights and duties of the stakeholders and the shareholders. It should be reviewed and revised periodically to ensure that it is in line with the current business environment, but it should not be revised to often so as to cause instability. A company which is wholly owned by one person need not have such an agreement. However, as soon as there is more than one owner, such an agreement is essential. Shareholders' Agreement is sometimes referred to in the U.S. as Stockholders' Agreement. SCOPE OF THE SHAREHOLDERS’ AGREEMENT
The Shareholders’ Agreement attempts to define the following, * Share Distribution: It will include the rights related to the issuance, sale, or subsequent distribution of shares. It will also have the pre-emptive rights and first refusal rights of the directors and management.
* Structure of the Company: This will inform shareholders of the persons who are running the organization and managing their money.
* Distinction in the Ownership of the Shares: This section helps distinguish between the different classes of shareholders. * Rights and Duties of the Shareholders: It informs the shareholders of how much they can or cannot participate in the running of the company or how much they can control the management of the money they have invested.
* Rights and Duties of the Management and the Employees: This is the legal foundation of the personnel aspect of the business and will ensure that the business is not run in an autocratic manner.
* Voting Rights: This section will outline the voting rights of the shareholders on management decisions, thereby indicating what control the shareholders will have over the management of the money they have invested.
* Vesting Rights: Conditions under which a shareholder can sell his shares and lockdown periods.
* Transfer of Shares: With the passage of time, directors and management may want to divest their shares. The shareholders’ agreement should contain guidelines and options for the selling and buying of shares, so that the overall share distribution ratio is not disturbed.
* Guidelines for Exigencies: This will include contingencies for the retirement or the death of a stakeholder or Director. These guidelines will ensure that there is minimum confusion as and when an emergency should occur. It will ensure business continuity and safeguard the interest of the shareholders.
* Quorum: Lays down the number of shareholders that needs to be present to hold a shareholders’ meeting and to pass a resolution.
* Composition of the Board of Directors: This is a legal requirement that clearly identifies members of the Board of Directors and their terms of employment or continuity. It will also describe the duties of the board.
* Compensation: Members of the Board of Directors are normally not employees of the company. Therefore, they need to be compensated for their effort in formulating policies and overseeing the management of the company.
* Conditions for Change in Composition: This section will lay down the conditions under which the Board of Directors may bring in a new...