What is the shareholders agreement?

A Shareholders’Agreement is a legal document that describes an arrangement among the shareholder’s of the company. It outlines the understanding regarding how the company would be operated and managed, administration of company, the shareholder's relationship, ownership of shares, privileges and protection of shareholders, initial funding etc.

A Shareholders’ Agreement is useful in defining the right and powers a shareholder obtains.

What are the advantages of having a Shareholders Agreement?

• It can be used to protect the position of minority shareholders.
• It allows the regulation of the appointment and removal of directors by giving certain powers to the shareholders.
• It allows regulation of raising capital.
• It provides an appropriate resolution of disputes when such arises, which can be through mediation or arbitration 
• It lays down terms of regulating the business and its management.
• It provides guidelines on installments, profits, and other advantages provided to the directors.
• An agreement characterizing the roles, responsibilities, and function of every investor will be helpful in preventing a future dispute.

How should a Shareholders’ Agreement be drafted?

• An efficient legal professional should be contacted with the requirements.
• Once the terms and objectives as per the requirement of the company and shareholder’s are clear, a draft agreement should be made.
• Once approved by the key management personnel, the Shareholders’ Agreement is finalized.

What details and terms are included in aShareholders’ Agreement?

The Shareholders Agreement is required to be carefully drafted including some vital points which shall be helpful in the long-term functioning of the company. Any carelessness in the drafting the agreement possible can render the understanding inadequate and ineffective.

Key terms included in it apart from the complete details of the parties are:

Term of purchase for investment

Terms of transfers of shares including

Transfers to the Company

Transfer to Others

The Company's Right to Purchase

The Continuing Shareholders Right to Purchase

Performance of Acceptance

Sale to Third Party

Right of Co-Sale

Term of sale or redemption upon termination of employment, disability or death

The purchase price for all Shares purchased and its payment

Rights upon registration

Closing pursuant to the exercise of a right to purchase or sell Shares

Entry of legend upon stock certificates

Conditions of after acquired shares - subsequent shareholders

Board of directors

Terms relating to community and marital property laws

Terms of pro rata allocations

Terms of authorization

Termination of the agreement

Dispute Resolution

Binding effect

Governing law

Thus, the Shareholders’ Agreement lays out a controlled structure for all investors to ensure them that their rights are secured. It defines clearly their commitments and obligations. Directions on how an individual can join the organization as another investor are also laid down.