Importance of Shareholders Agreement
A shareholders agreement is a legal agreement between a firm and the stakeholders of an organization. The importance of a shareholders agreement can be understood from the fact that it specifies the obligations and responsibilities of shareholders and, simultaneously, governs the way in which the company is regulated and managed by its directors and stockholders.
This article will briefly describe the importance of Shareholders Agreement. Along with that, it will also lay down the provisions of Shareholders Agreement.
Objective of Shareholders Agreement
A shareholders agreement is a contract between the shareholders of a firm and the firm which generally lays forth the responsibilities, liabilities, and privileges of the shareholders as well as the framework within which the organization will be formed, governed, and controlled.
They define the firm’s duties and responsibilities to owners and stakeholders, as well as any limitations on such duties and responsibilities. The shareholders’ agreement aims to preserve shareholders’ rights while treating them equitably.
The importance of shareholders agreement can be understood from the fact that it aids in preventing unfair treatment of existing stakeholders by any potential administrative authorities.
Provisions of a Shareholders Agreement
A shareholder’s agreement includes the following provisions:
- Types of business
- Company’s operations
- Stock issuance and transfer
- Dividends
- Safeguarding minorities
- Techniques for resolving conflicts
- Business restrictions
- Financial and capital investments
- Allotment of important obligations and responsibilities
What is the Importance of Shareholders Agreement?
The importance of shareholders agreement can be understood from the fact that it provides various strategies that can help to reduce potential issues that can arise in the later stages of conducting business operations.
Moreover, it clearly defines the method that can help resolve possible disputes and also aids in protecting the aids in preventing any sort of discriminatory practices of company stakeholders by any potential management.
Listed below are a few points that would help you understand the importance of shareholders agreement.
1. Offers clarity
One of the importance of a shareholders agreement is that it offers clarity and openness regarding the duties and obligations of the firm, its stakeholders, and its administrators. This can result in a smoother, more professional, and proper control of the corporation, which lowers the likelihood of possible disagreements.
2. Resolves shareholder disagreement
The corporation and its stockholders must be protected by the shareholders’ agreements. This is because stockholders aren’t always committed to a business and they may attempt to align themselves with other firms, which could be problematic for the corporation. Hence, another importance of shareholders agreement is that in the event of disagreement between the two parties, a shareholders’ agreement will specify the steps that must be taken in order to resolve the disagreement.
3. Regulates share transfers
Shareholders agreements is a legally enforceable document that describes how shares in a corporation can be transferred. It includes the provisions for shares transfer including pre-emption privileges, mandatory transfer clauses, and authorized transfers.
4. Financing
A firm will need access to finance, whether it be during the beginning stage, the operating stage, or both. Depending on the stockholders‘ respective stake in the company, a shareholders’ agreement may specify how the company will receive finances and if the stockholders are required to contribute to those funds.
5. Provides security to minority stakeholders
Minority shareholders may benefit from the security offered by a shareholders’ agreement that reserves specific actions, for instance, the firm’s right to transfer additional shares, which can only be done with the majority assent of all stockholders. One importance of shareholders agreement is the Tag Along provision. Whenever a majority stakeholder party intends to offer its assets to a 3rd party, the tag-along clause enables minority stakeholders to tag along as well.
6. Provides security to majority shareholders
If the dominant shareholder party wants to sell its shares to a third-party buyer, a drag-along provision gives it the power to compel minority shareholders to surrender their shares under the same terms. This basically makes it possible for the prospective purchaser to obtain 100 percent of the business instead of just a majority stake, making it more appealing to the purchaser.
7. Resolves conflict
In the occurrence of a disagreement, a well-written shareholders’ agreement may outline a conflict settlement process that needs to be undertaken, with the purpose of promptly settling disagreements to safeguard the corporation’s operations. The clauses of a shareholders agreement may help to resolve any misunderstandings among the stakeholders, and further help in preventing a conflict from worsening.
8. Exit Strategies
In the situation, that the stakeholders are unable to continue operating in the firm together, a well-written stakeholders’ contract can outline the various exit options for the stakeholders. The agreement can outline important matters made by the firm, such as what will occur if there is a falling out between the partners, a stakeholder is compelled to leave, or a stakeholder voluntarily wishes to leave the company.
How can shareholders benefit from the shareholder's agreement?
Typically, a company’s stockholders are divided into minority and majority stakeholders. Majority shareholders are those who together own over fifty-one percent of the organization’s share capital, while minority stakeholders are those who together own less than that percentage.
We are all aware that the Shareholders eventually make all business-related decisions, whether they are management or operational. Voting rights are available to equity shareholders at all corporate general meetings. If two groups of shareholders disagree about a particular choice, the majority stockholders’ decision will take precedence over the minority stockholders’ opinion.
In the opposite circumstance, the decision of the majority stockholders may become invalid due to the minority shareholders’ refusal to accept. A classic illustration of this circumstance is when a third party is proposed to buy the organization as a continuing concern, but the Minority Shareholders object since the prospective buyer wants full control of the business. Due to the opposition of the minority shareholders, the complete transaction might not be carried out in this case.
Rarely do start-up businesses intend to create a product, market it, and then sell their organization to a larger organization once it starts to grow. The purpose of this kind of deal could be to avoid operational risks unrelated to the promoters’ main competencies or it could be to profit from the asset these promoters have built. If any of the stockholders object to the sale in this situation, the majority shareholder will have to withdraw the proposal to sell.
In such kind of scenario, if there is a shareholders agreement present, then the agreement can protect the interests of both minority and majority shareholders while facilitating the smooth operation of an organization.
Conclusion
A shareholders’ agreement lays forth the powers, duties, and responsibilities of the stockholders as well as the framework within which the organization will be formed, governed, and administered. A shareholders’ agreement is a reasonable and affordable solution to reduce any problems or possible conflicts that may arise in the later stages of the business. Therefore, it is essential to properly construct the shareholders agreement while keeping in mind that the agreement still functions as intended by the shareholders.
The following article provides a succinct explanation of the importance of shareholders agreement in the corporate world. If you want to draft a shareholders agreement or have any queries on the importance of shareholders agreement, you can consult experts from OnDemand International. We will help you in carefully create the agreement and will further help you with any queries you may have.
FAQ’s
A shareholders’ agreement is a legal agreement between a firm and its shareholders that governs the connection between the shareholders, the administration of the business, share ownership, and the privileges, responsibilities, and security of the stakeholders.
- Types of business
- Company’s operations
- stock issuance and transfer
- Dividends
- safeguarding minorities
- techniques for resolving conflicts
- business restrictions
- financial and capital investments
- allotment of important obligations and responsibilities
- A shareholders agreement is important because it provides transparency and clarity regarding the responsibilities of the company, its shareholders, and its administrators.
- A well-written shareholders’ agreement may provide a dispute resolution procedure that must be followed in the event of a dispute, with the aim of quickly resolving disputes to protect the corporation’s operations.
- A well-written stakeholders’ contract can detail the many exit choices for the stockholders in the event that they are unable to continue working together in the company.
- Minority shareholders may benefit from the security offered by a shareholders’ agreement that reserves specific actions, for instance, the firm’s right to transfer additional shares, which can only be done with the majority assent of all stockholders.
- Whenever a majority stakeholder party intends to offer its assets to a 3rd party, the tag-along clause enables minority stakeholders to tag along as well.
