Shareholders agreement

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Shareholders agreement

  1. 1. CHENNAI3rd Floor, ‘Creative Enclave’, SHAREHOLDERS148-150, Luz Church Road, Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 AGREEMENT BANGALORE Suite 920, Level 9, Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 SUCHITRA BAI EMAIL PATENT DEPARTMENT info@altacit.com WEBSITE www.altacit.com
  2. 2. INTRODUCTION CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, A Shareholders’ Agreement is a contract between Mylapore, Chennai - 600 004. shareholders of a private limited company with the various provisions that will govern each of the Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, 26-27, M G Road, shareholders who are party to the agreement vis- Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 à-vis the Company and the shares held by each COIMBATORE BB1, Park Avenue, such shareholder and also the provisions that will govern the management of the Company as # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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’ EMAIL info@altacit.com agreement. WEBSITE www.altacit.com
  3. 3. NEED FOR EXECUTING SHAREHOLDERS AGREEMENT CHENNAI3rd Floor, ‘Creative Enclave’, Shareholders’ agreements lay down clearly defined rights and obligations between and of the parties,148-150, Luz Church Road, Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 i.e.: BANGALORE Suite 920, Level 9, Raheja Towers, a. Appointment of Directors and quorum requirements; 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, b. Determining the matters requiring special # 48, Race Course Road, Coimbatore - 641018. resolution or providing veto rights to certain shareholders (more so in case of private equity and Tel: +91 - 422 – 6552921 venture capital partners); c. Financing the requirements of the company; d. Restrictions on right to transfer shares freely; EMAIL info@altacit.com e. Defining the obligation of each of the WEBSITE shareholder towards the company. www.altacit.com
  4. 4. TYPES OF CLAUSES IN SHAREHOLDERS’ AGREEMENTS IN INDIA? CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, • The shareholder’s agreements provide for matters such as restrictions on Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, transfer of shares, forced transfers of 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 shares, nomination of directors for COIMBATORE BB1, Park Avenue, representation on boards, quorum requirements and veto or # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 supermajority rights available to certain shareholders at board level or shareholder level. EMAIL info@altacit.com WEBSITE www.altacit.com
  5. 5. MECHANISMS DOES THE LAW OF INDIA PERMIT FOR REGULATING SHARE TRANSFERS? CHENNAI a. Right of first refusal:3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, This is an agreement between the existing Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, shareholders whereby the shareholder Raheja Towers, 26-27, M G Road, wishing to sell to a third party must first Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 offer the shares to the holder of the first refusal right. If the holders of the right of COIMBATORE BB1, Park Avenue, # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 first refusal do not buy the shares, the shareholder can normally sell freely to a third party. EMAIL info@altacit.com WEBSITE www.altacit.com
  6. 6. CHENNAI b. Right of first offer: This is a3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, variation of the right of first refusal in Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, which a fixed price is agreed to from the outset. The shareholder wishing to 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, sell shall first offer the shares to the holder of the right of first offer holder # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 at the fixed price. If the holder of the right does not purchase the shares, the shareholder wishing to sell is free to EMAIL info@altacit.com sell it to a third party. WEBSITE www.altacit.com
  7. 7. CHENNAI c. Drag-along and Tag-along Rights: Drag-3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, along right is an agreement between the Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, shareholder, where the shareholder 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 wishing to sell his shares to a third party COIMBATORE BB1, Park Avenue, has the right to drag all the other shareholders and make complete exit from # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 the company. Tag-along right is the opposite - the other shareholders have a right to tag along with the shareholder EMAIL info@altacit.com wishing to sell his shares to a third party. WEBSITE www.altacit.com
  8. 8. CHENNAI d. Buy-back rights: These give3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, the company the right to redeem Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 the shares of a certain shareholder BANGALORE Suite 920, Level 9, Raheja Towers, in specific circumstances, such as 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, withdrawal or death of the shareholder. Coimbatore - 641018. Tel: +91 - 422 – 6552921 EMAIL info@altacit.com WEBSITE www.altacit.com
  9. 9. CHENNAI e. Call option: Call option gives3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, its holder the right to buy a Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 specified number of shares of the BANGALORE Suite 920, Level 9, Raheja Towers, underlying stock at a 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, predetermined price (strike price) between the date of purchase and Coimbatore - 641018. Tel: +91 - 422 – 6552921 the options expiration date. EMAIL info@altacit.com WEBSITE www.altacit.com
  10. 10. CHENNAI f. Put Option: Put option gives its3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, holder the right to sell a specified Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 number of shares of the underlying BANGALORE Suite 920, Level 9, Raheja Towers, common stock at a predetermined 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, price (strike price) on or before the expiration date of the contract. Coimbatore - 641018. Tel: +91 - 422 – 6552921 EMAIL info@altacit.com WEBSITE www.altacit.com
  11. 11. ARBITRATION CLAUSE IN A SHAREHOLDERS’ AGREEMENT CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, • The parties to the shareholders’ agreement are free to include an Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, arbitration clause with seat outside India and/or under a law other that of India Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, as long as one of the parties to the # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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 EMAIL the provisions of the Indian Arbitration Act, 1996 being applicable to it. info@altacit.com WEBSITE www.altacit.com
  12. 12. ARE MINORITY SHAREHOLDERS PERMITTED TO PARTICIPATE CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, • There are no specific provisions under Indian law to ensure participation of Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, minorities on the board of directors of a company. Also, Indian law does not Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, provide for provisions ensuring minority # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 control over board of directors. However, the minority shareholders can be given the right to nominate directors on the board of directors by contractual EMAIL arrangement between the shareholders. info@altacit.com WEBSITE www.altacit.com
  13. 13. TYPES OF SHAREHOLDERS AGREEMENTS CHENNAI3rd Floor, ‘Creative Enclave’, • Pre-incorporation/formation agreement an agreement148-150, Luz Church Road, Mylapore, put in place between the parties who intend to form a Chennai - 600 004. Tel: +91 - 44 - 2498 4821 company and to be its initial shareholders. BANGALORE Suite 920, Level 9, • Subscription and shareholders agreement: a shareholders agreement entered into between parties Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 who are subscribing for shares contemporaneously COIMBATORE BB1, Park Avenue, with the entry into the shareholders agreements. # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 • Shareholders agreement governing a 50:50 shareholding position. • Shareholders agreement governing a majority/minority situation. • Shareholders agreement governing a joint venture EMAIL situation. info@altacit.com WEBSITE www.altacit.com
  14. 14. ADVANTAGES - SHAREHOLDERS AGREEMENT CHENNAI3rd Floor, ‘Creative Enclave’, • Privacy: The predominant reason for using a148-150, Luz Church Road, Mylapore, Chennai - 600 004. Shareholders agreement is that it is a private document between parties thereto which can Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, 26-27, M G Road, be made subject to express confidentiality Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 restrictions. By contrast the Articles of COIMBATORE BB1, Park Avenue, Associate are a public document available for inspection by members of the public in the # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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 EMAIL info@altacit.com internal management matters. WEBSITE www.altacit.com
  15. 15. CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, • Greater Binding Effect: As explained above articles of Association can only Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, bind a shareholder in his capacity as Shareholder. By contrast shareholders’ Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, agreements may be used to give rights # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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 EMAIL imposing obligations on a party in his capacity as a Director. info@altacit.com WEBSITE www.altacit.com
  16. 16. CHENNAI3rd Floor, ‘Creative Enclave’,148-150, Luz Church Road, • Variation: As explained above Articles of Association can be amended by Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 BANGALORE Suite 920, Level 9, Raheja Towers, way of a special resolution. By 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 contrast, unless a shareholders COIMBATORE BB1, Park Avenue, agreement expressly provides for a specific variation mechanism it can # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 only be varied by unanimous agreement of the parties thereto. EMAIL info@altacit.com WEBSITE www.altacit.com
  17. 17. DISADVANTAGES CHENNAI3rd Floor, ‘Creative Enclave’, • Binding Effect: Because of its nature as a contact a shareholders agreement only binds the parties148-150, Luz Church Road, Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 thereto and does not automatically bind all shareholder. Therefore if a party transfers his BANGALORE Suite 920, Level 9, Raheja Towers, 26-27, M G Road, Bangalore - 560 001. shares the transferee will not automatically be bound by the terms of the shareholders Tel: +91 - 80 - 6546 2400 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, agreement. To circumvent this it is normal to provide in a shareholders agreement that an Coimbatore - 641018. Tel: +91 - 422 – 6552921 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 EMAIL info@altacit.com transferee as a party to the shareholders WEBSITE agreement. www.altacit.com
  18. 18. CHENNAI3rd Floor, ‘Creative Enclave’, • Interpretation: Again as shareholders agreements are contracts they are subject to the ordinary rules148-150, Luz Church Road, Mylapore, Chennai - 600 004. Tel: +91 - 44 - 2498 4821 of contract law, in the event a dispute arising as to BANGALORE Suite 920, Level 9, the meaning of a provision in the shareholders agreement a court would, as a primary means of Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 interpretation, seek to establish what was the intent COIMBATORE BB1, Park Avenue, of the parties based on the wording of the contract. # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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 EMAIL to assist in the interpretation of those provisions. info@altacit.com WEBSITE www.altacit.com
  19. 19. WHEN A SHAREHOLDER BE COMPELLED TO TRANSFER HIS SHARES CHENNAI3rd Floor, ‘Creative Enclave’, • Where an individual shareholder becomes148-150, Luz Church Road, Mylapore, Chennai - 600 004. bankrupt. Tel: +91 - 44 - 2498 4821 BANGALORE • Where a corporate shareholder becomes insolvent or has a receiver or an examiner Suite 920, Level 9, Raheja Towers, 26-27, M G Road, Bangalore - 560 001. Tel: +91 - 80 - 6546 2400 appointed. COIMBATORE BB1, Park Avenue, • Where a corporate shareholder transfers shares # 48, Race Course Road, Coimbatore - 641018. Tel: +91 - 422 – 6552921 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. EMAIL • Where an individual shareholder is an employee info@altacit.com of the company and he ceases to be employed by WEBSITE www.altacit.com that company.
  20. 20. 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 COIMBATORE BB1, Park Avenue, # 48, Race Course Road, THANK YOU Coimbatore - 641018. Tel: +91 - 422 – 6552921 EMAIL info@altacit.com WEBSITE www.altacit.com

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