Legal Importance & Sanctity of Executing a Shareholders Agreement (SHA): Lawyers Advice
A Shareholders Agreement is essentially an agreement entered into between the company and shareholders, which enlist the rights and obligations of the shareholders. It is made with the objective of promoting and protecting investment in the company and establishing a fair relationship between the shareholders. It plays a huge role in governing how the Company is to be run. Shareholders Agreement contains certain important things such as-
• The structure of the Company
• Rights and obligations of the shareholders
• Regulation on sharing and transferability of shares
• Method of valuing shares or business of the Company
• How the Company will be run
• Duties and responsibilities of each shareholder
• Protection of minority shareholders
• How the decision making will be done
A well-drafted Shareholders Agreement helps in protecting the interests of a minority as well as majority shareholder and ensures that the functioning of the Company is done in a fair and smooth manner.
Legal Advantages of Executing a Shareholders Agreement (SHA)
A Shareholders Agreement proves to be beneficial on multiple fronts such as –
• In case of a difference of opinion or if a dispute arises, the Shareholders Agreement lays down ways in which the dispute can be resolved. It gives a clear-cut formula to make decisions and lays down policies and procedure for dispute resolution.
• The Agreement clearly defines the roles of the shareholders in order to avoid discrepancies in understanding.
• It is a private document, which is made to ensure and protect the confidentiality of the parties. It helps in protecting the sensitive internal matters.
• Since this Agreement imposes rights and obligations on the individuals, it has a greater binding effect to the capacity of the shareholder.
• It contains an arrangement, which is suitable for and agreed upon by the shareholders and this can vary from the generic legal position.
• It can be beneficial while raising finance from banks or creditors and demonstrates a stable business to potential investors.
• It seeks to safeguard the financial interest of every shareholder and their families.
• It protects the interests of minority shareholders and the value of their investment in the shareholding.
Legal Importance & Legal Sanctity of a Shareholders Agreement (SHA)
There is no valid provision as such that governs or sets down the rules for a shareholders agreement and there is no legal formality as well. However, certain aspects of the contract act help in forming the framework of this agreement. The clauses of the shareholders agreement are made in tandem with the Articles of association in order to avoid conflicts. However, the Articles of Association hold priority over the Shareholders Agreement and it should be ensured that the provisions existing in the shareholders agreement are made vis-à-vis the Articles of association. This is done so that the Articles of Association have the legal sanctity to help solve inter-se disputes.
In case a private company is not part of the shareholders agreement, the clauses related to the shareholders agreement should necessarily be mentioned in the articles of association. However, in case a public company is not part of the shareholders agreement and the shareholders agreement is not in contravention with the company act or articles of association, then it can be enforceable against the members. However, there can be no obligations imposed on the statutory powers of the Government.
However, if the company is a party to the Shareholders agreement, the agreement is enforceable against the company according to the principles enshrined in the contract.
The main issue that arises is the fact that the Shareholders Agreement is not compulsory and so, people tend to not enforce it and this causes problems.
• V.B. Rangaraj v. V.B. Gopalakrishnan & Ors. (AIR 1992 SC 453) was one of the first cases relating to the shareholders agreement that went to the Supreme Court. In this case, the dominance of articles of association over the shareholders agreement was questioned. The dominance of articles of association over the shareholders agreement was asserted as the fact that a certain provision was in the shareholders agreement but not in the articles of association made it unenforceable in that scenario.
• In Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613], it was held, that the shareholders have liberty to enter into any contract in the best interests of the Company, provided that it is not contrary to the articles of association. In case a breach of SHA does not violate the articles of association, the aggrieved parties can claim remedies under the general law of the land for breach of the agreement.
• In Premier Hockey Development Private Limited v. Indian Hockey Federation (2011 SCC OnLine Del 2621), the petitioner company and the Indian Hockey Federation entered into a Shareholders Agreement. The agreement was held to be enforceable against both the Parties as they were both party to the agreement and were legally bound by it.
The Shareholders Agreement outlines the relationship between the parties as well as their rights and responsibilities. It also includes their duties and obligations, which is very important in order to avoid confusion and conflicts. Although it is not compulsory to enforce a shareholders agreement, it is always better to do so. People get into unnecessary conflicts and litigations if the Shareholders Agreements are not enforced thus it becomes better to enforce these agreements.
Authored By: Adv. Anant Sharma & Ankita Sethi