A PRACTICAL GUIDE TO THE SHAREHOLDER’S AGREEMENT

A PRACTICAL GUIDE TO THE SHAREHOLDER’S AGREEMENT

A PRACTICAL GUIDE TO THE SHAREHOLDER’S AGREEMENT

 

Shareholders of a private company generally emphasis personal relationships with each other to operate the business.

Death, Disability, or Bankruptcy of one of the Shareholders might need a transfer of the shareholders’ stock to existing shareholders, as opposed to the deceased shareholder’s beneficiaries inheriting those shares.

 

  • Buy-Sell Clause

A buy-sell provision in the agreement means that the remaining shareholders have the first right to purchase those shares.

  • Management

A shareholders agreement involves a shareholder's right to participate in the management of the company or appoint a director if that shareholder holds in excess of a specified number of shares in the company.

  • Dispute Resolution Clause

The agreement should have a dispute resolution provision to neglect shareholders issuing legal proceedings. This clause will appoint an agreed valuer to value the shares for purchase or sale and referral to a qualified consultant or mediator to solve the dispute at mediation. Sections 232 and 233 of the corporation's activities provide a shareholder with the right to pursue any fraud or oppression.

  • Shareholder Exit Strategy

Such an agreement should state an exit strategy for shareholders wanting to sell their shares, including the appointment of a valuer to value the stock intended to be sold.

Can a Majority Shareholder force a Buyout?

A special resolution is needed for a majority shareholder to purchase a minority shareholder’s shares. The special resolution requirements will be different for each agreement, depending on the number of shareholders and the kind of shares issued in the company.

A minority shareholder can still go for legal redress under provisions of Section 232 or 233 of the corporation's act, in respect of any ‘Oppressive Conduct’.

  • Derivative Action

It is when a shareholder sues on behalf of the company to safeguard the business. The corporation itself doesn’t issue the claim. A shareholder can pursue it when he or she believes that the company’s management is participating in fraud, dishonesty, or personal financial profit at the cost of the business.

  • Share Sales

A right of first refusal clause gives each of the shareholders the authority to purchase shares managed by another shareholder who wants to leave before any other party purchasing those same shares.

  • Tag along clause is made to safeguard minority shareholders in the case when a majority shareholder decides to leave and sell his or her shares. The minority shareholder will have the right to be bought out, on a pro-rata basis, along with the majority shareholder.

  • Drag along clause permits a majority shareholder to drag along a reluctant minority shareholder in the case of an exit.

  • Director and Officer Rights

The right to appoint directors gives an assurance that the board includes directors who represent the interests of each shareholder, including minority shareholders, and some management on how the business is managed.

  • Pre-Emptive Rights

With pre-emptive rights, a minority shareholder has the right to purchase any new shares issued. This safeguards the shareholder’s percentage of ownership. But it can also delay investment from third parties.

  • Shotgun Clause

This clause gives the right to the shareholder to sell or purchase his shares to another shareholder if that shareholder cannot solve an issue related to the company’s operation or sale. The share sale price is based on a fair value sale price, referring by way of agreement or valuation by a valuer agreed between the parties.

  • Piggyback Rights

It’s when a majority shareholder sells its shares; a minority shareholder has the right to be involved in the deal. This safeguards the minority shareholder’s investment, should the company be sold.

This provision states that any party dealing with the purchase of the business is able to buy 100 percent of the outstanding shares.

  • Non-Compete Clause

A shareholder should not compete with the business for the entire time of share ownership, and for a specific period after the sale of shares.

  • Investment

In a small business, minority shareholders may need to approve a significant expenditure of money to safeguard their investment in the business. Making a plan for buying out an unhappy shareholder is an effective way to avoid a lawsuit

The following things should be kept in mind before entering into a Shareholder Agreement

  • Who can be a Shareholder?

  • How will the Operations Be Governed?”

  • Who can be a Director?

  • What will happen if a Shareholder Resigns, Retires, Dies, or gets Fired?

  • What will be the Worth of Each Share of Stock?

  • Can a Shareholder take Stock with them if they leave the Company?

  • Do Majority and Minority Share Values have the same Proportionate Value?

  • How much Should a Business Pay to a Departing Shareholder to Purchase their Shares?

To know more about, what is shareholder's agreement, see the video below -

 

 

 

 

BY-

SHRUTI KULSHRESTHA