Shareholders agreement

CHENNAI3rd Floor, ‘Creative Enclave’,

148-150, Luz Church Road,Mylapore,

Chennai - 600 004.Tel: +91 - 44 - 2498 4821

BANGALORE Suite 920, Level 9,

Raheja Towers,26-27, M G Road,

Bangalore - 560 001.Tel: +91 - 80 - 6546 2400

COIMBATOREBB1, Park Avenue,

# 48, Race Course Road,Coimbatore - 641018.

Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

SHAREHOLDERS AGREEMENT

SUCHITRA BAIPATENT DEPARTMENT



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

INTRODUCTION

A Shareholders’ Agreement is a contract between shareholders of a private limited company with the various provisions that will govern each of the shareholders who are party to the agreement vis-à-vis the Company and the shares held by each such shareholder and also the provisions that will govern the management of the Company as agreed to by the parties to the agreement. It may be noted that in case of a public limited company, there may be enforceability issues with certain provisions of the shareholders’ agreement.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

NEED FOR EXECUTING SHAREHOLDERS

AGREEMENT Shareholders’ agreements lay down clearly defined rights and obligations between and of the parties, i.e.:

a. Appointment of Directors and quorum requirements;

b. Determining the matters requiring special resolution or providing veto rights to certain shareholders (more so in case of private equity and venture capital partners);

c. Financing the requirements of the company; d. Restrictions on right to transfer shares

freely; e. Defining the obligation of each of the

shareholder towards the company.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

TYPES OF CLAUSES IN SHAREHOLDERS’ AGREEMENTS

IN INDIA?

• The shareholder’s agreements provide for matters such as restrictions on transfer of shares, forced transfers of shares, nomination of directors for representation on boards, quorum requirements and veto or supermajority rights available to certain shareholders at board level or shareholder level.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

MECHANISMS DOES THE LAW OF INDIA PERMIT FOR REGULATING SHARE

TRANSFERS?

a. 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. If the holders of the right of first refusal do not buy the shares, the shareholder can normally sell freely to a third party.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

b. Right of first offer: This is a variation of the right of first refusal in which a fixed price is agreed to from the outset. The shareholder wishing to sell shall first offer the shares to the holder of the right of first offer holder at the fixed price. If the holder of the right does not purchase the shares, the shareholder wishing to sell is free to sell it to a third party.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

c. Drag-along and Tag-along Rights: Drag-along right is an agreement between the shareholder, where the shareholder wishing to sell his shares to a third party has the right to drag all the other shareholders and make complete exit from the company. Tag-along right is the opposite - the other shareholders have a right to tag along with the shareholder wishing to sell his shares to a third party.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

d. Buy-back 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.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

e. Call option: Call option gives its holder the right to buy a specified number of shares of the underlying stock at a predetermined price (strike price) between the date of purchase and the options expiration date.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

f. Put Option: Put option gives its holder the right to sell a specified number of shares of the underlying common stock at a predetermined price (strike price) on or before the expiration date of the contract.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

ARBITRATION CLAUSE IN A SHAREHOLDERS’ AGREEMENT

• The parties to the shareholders’ agreement are free to include an arbitration clause with seat outside India and/or under a law other that of India as long as one of the parties to the shareholders is a non-resident. However, the parties should specifically include a clause excluding Part 1 of the Indian Arbitration Act, 1996, in order to avoid the provisions of the Indian Arbitration Act, 1996 being applicable to it.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

ARE MINORITY SHAREHOLDERS PERMITTED TO PARTICIPATE

• There are no specific provisions under Indian law to ensure participation of minorities on the board of directors of a company. Also, Indian law does not provide for provisions ensuring minority control over board of directors. However, the minority shareholders can be given the right to nominate directors on the board of directors by contractual arrangement between the shareholders.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

TYPES OF SHAREHOLDERS

AGREEMENTS• Pre-incorporation/formation agreement an agreement put in place between the parties who intend to form a company and to be its initial shareholders.

• Subscription and shareholders agreement: a shareholders agreement entered into between parties who are subscribing for shares contemporaneously with the entry into the shareholders agreements.

• Shareholders agreement governing a 50:50 shareholding position.

• Shareholders agreement governing a majority/minority situation.

• Shareholders agreement governing a joint venture situation.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

ADVANTAGES - SHAREHOLDERS AGREEMENT

• Privacy: The predominant reason for using a Shareholders agreement is that it is a private document between parties thereto which can be made subject to express confidentiality restrictions. By contrast the Articles of Associate are a public document available for inspection by members of the public in the Companies Registration Office. This makes the Articles of Association an unsuitable means for dealing with matters such as, for eg., the remuneration of directors or other sensitive internal management matters.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

• Greater Binding Effect: As explained above articles of Association can only bind a shareholder in his capacity as Shareholder. By contrast shareholders’ agreements may be used to give rights and impose obligations on shareholders. Eg., binding a person in his capacity as director or as a creditor or agent. However one needs to be very careful in imposing obligations on a party in his capacity as a Director.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

• Variation: As explained above Articles of Association can be amended by way of a special resolution. By contrast, unless a shareholders agreement expressly provides for a specific variation mechanism it can only be varied by unanimous agreement of the parties thereto.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

DISADVANTAGES

• Binding Effect: Because of its nature as a contact a shareholders agreement only binds the parties thereto and does not automatically bind all shareholder. Therefore if a party transfers his shares the transferee will not automatically be bound by the terms of the shareholders agreement. To circumvent this it is normal to provide in a shareholders agreement that an existing shareholder who is party to a shareholders agreement can only transfer his shares if he procures that the transferee enters into what is known as a deed of adherence which joins the transferee as a party to the shareholders agreement.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

• Interpretation: Again as shareholders agreements are contracts they are subject to the ordinary rules of contract law, in the event a dispute arising as to the meaning of a provision in the shareholders agreement a court would, as a primary means of interpretation, seek to establish what was the intent of the parties based on the wording of the contract. By contrast the language in articles of association has become in many respects fairly standardized and many of the provisions used in articles of association have been judicially considered over the years and there may therefore be available judicial precedent to assist in the interpretation of those provisions.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

WHEN A SHAREHOLDER BE COMPELLED TO TRANSFER HIS

SHARES• Where an individual shareholder becomes

bankrupt.• Where a corporate shareholder becomes

insolvent or has a receiver or an examiner appointed.

• Where a corporate shareholder transfers shares to another member of its group and that transferee ceases to be member of the group.

• Sometimes but less frequently, where an individual shareholder dies.

• Where an individual shareholder is an employee of the company and he ceases to be employed by that company.



Chennai - 600 004.Tel: +91 - 44 - 2498 4821



Bangalore - 560 001.Tel: +91 - 80 - 6546 2400



Tel: +91 - 422 – 6552921

EMAIL

[email protected]

WEBSITE

www.altacit.com

THANK YOU

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Shareholders agreement