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The Shareholders Agreement is intended to protect the rights and to ensure proper treatment of the Shareholders in a company. In comparison to the company by-laws which are mandatory under the Companies Act, the Shareholder's Agreement is an optional agreement entered into between some or all the Shareholders in a Company.
Unlike company by-laws, the Shareholders Agreement is a private document and the contents of the same can be kept confidential.
The Shareholders Agreement is binding only on the parties to the Agreement, and it is a contractual arrangement between the parties. A properly drafted Shareholders Agreement will help to maintain a healthy relationship between the parties.
This Shareholder's Agreement includes the following details:
How to use this document?
The Shareholders can enter into this Agreement at any time before or after the commencement of the Company. This Agreement can be used for both Private and Public companies.
It is better to cross-check the by-laws of the Company mentioned under the Articles of Association (AoA) before drafting this Agreement to avoid any disparity. The changes to AoA can also be made after entering into this Agreement.
The Parties to this Agreement can specify whether a new Party can become a Party to this Agreement or not. The voting support required to admit a new Party can also be specified under this Agreement.
A First Refusal clause can be added to this Agreement. Under which, the Shareholders will be restricted from selling their shares to an unrelated third-party (non-party to this Agreement) without giving an offer to purchase to other Parties to this Agreement.
A Drag-Along Rights clause can be added to this Agreement. The Drag-Along clause gives majority Shareholders (pre-determined percentage of Shareholders) who wish to sell their shares to an unrelated third-party, the right to force the remaining shareholders to sell their shares on the same terms.
A Tag-Along Rights clause on the other hand provides "co-sale rights" to the Shareholders. Generally, this clause is used to protect the minority shareholders of the Company. Thus, if majority shareholders sell their stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the Company.
An Anti-Dilution helps the Shareholders of the Company to maintain the size of their stake in the Company when and if additional Shares are offered. In the absence of an Anti-Dilution clause, it may lead to a decline in ownership percentage and loss in value of Shares of existing Shareholders.
The Parties can include a Confidential Clause or Non-Disclosure Clause in this agreement as per the requirement. This is used to protect the confidential information of the Agreement. If the Parties want to fix more complete provisions concerning the confidentiality obligation (for instance: what should and should not be considered confidential information, for how long should they be kept confidential, etc.), they can sign a separate Non-Disclosure Agreement.
The parties can include a Non-Compete Clause, under which the Parties to this Agreement will be restricted from competing with the Company for a particular period in a specific region. A Non-Solicit Clause can be added under this Agreement, under which parties will be barred from soliciting or recruiting the customers and employees of the Company for a particular period. If the Client needs an exclusive Non-Compete and Non-Solicit Agreement, a separate Non-Compete Agreement can be used.
The Parties can also include the Arbitration Clause in this agreement. Under Arbitration, any dispute that arises between the parties will be referred to a third neutral person ("Arbitrator") appointed mutually by both parties. The Arbitrator will hear both the parties and decide the case on its merits. The decision of the Arbitrator will be final and binding on both parties.
While drafting, keep in mind not to violate the laws under the Companies Act, 2013, the Indian Contract Act,1872, and other applicable laws. If this Agreement contradicts the terms of the Article of Association, the clauses under this Agreement could not be enforced under the law. To be enforceable, such changes shall be incorporated under the Articles of the Company.
After completing this document, the document should be signed by all the parties to the Agreement, and each party shall have at least one copy for record purposes.
The Companies Act, 2013 governs the operation of companies in India. Also, the rules under the Indian Contract Act, 1872 is also applicable.
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