Sethi & Associates

Most important clauses of a Shareholders Agreement

admin — Wed, 20 Sep 2023 06:02:44 +0000

A Shareholders Agreement (SHA) is vital for the long-term growth of company because it not only contains the relation between shareholders but also the necessary obligations. In general, having a Shareholders Agreement seem not necessary but once difference of opinion arises between shareholders, the first resort is the Shareholders Agreement where all the rights and responsibilities are defined. It is prepared to supplement the Article of Association (AOA) of the Company since the AOA or Company Laws are restricted only to functioning of a company.

Earlier Shareholder Agreements were not given importance which caused many controversies. However, with change in time, investors are becoming aware of it and taking necessary steps to save their money and time invested to establish a business. The nature of a Shareholders Agreement is protective which makes it effective in resolving disputes between shareholders, if occurs.

What is a Shareholders’ Agreement?

A shareholder agreement is a written and a binding arrangement between the shareholders of a company to protect their investment and establish a fair relationship between them. The Shareholders’ Agreement can also govern how the company will run by incorporating important terms relating to the company along with rights and obligation of the shareholders. It is drafted in such a way that makes it becomes beneficial for both majority as well as minority shareholders.

What makes Shareholders’ Agreement so important??

It explains the Relation between all or a specific class of shareholders
It sets out the rights and entitlements of Shareholders who are parties to the Agreement
It protects an element of protection to the minority shareholders
It regulates the important decision taking mechanism
It regulates the sale of shares of the company (Exit mechanism)

Most important clause of a Shareholders’ Agreement:

Pre-emptive Rights Clause: Pre-emptive rights are enforced when the new shares are issued by the company. Pre-emptive Right requires the company to issue the newly issued shares of company to the existing shareholders in proportion to their existing shareholding before offering them to non-existing party. This clause is incorporated to save the existing shareholders from involuntary dilution of their stake in the company.

Restriction on Transfer: This is a general clause which requires a seller of a share to inform his wish to the company in writing and obtaining written permission of all the existing shareholders. This clause not only restricts the right to transfer the shares but also defines the valuation method and other conditions pursuant to a transfer.
Right to appoint Directors: Company Laws gives power to majority shareholders of the company to appoint Directors and minority shareholders get no seat on the Board. Shareholders Agreement may set up a mechanism to appoint directors by minority shareholders till they hold specified numbers of shares.
Right of First Refusal Clause (ROFR): A high-valued and frequently used clause that makes the shareholders confident about safety of their investment. When one party to the agreement wish to sell their shares to a third party, they are required to give the notice of such sale to the other existing shareholders (Transfer Notice) detailing the complete terms & conditions. Existing Shareholders get a right but not obligation to buy those shares on the same conditions on which the seller was willing to sale those shares. If all the existing Shareholders refuse to buy those shares on the condition specified by third party, then only the seller can sell it to such third party.
Drag-Along Right: Drag-Along Right is an important clause as sometimes it becomes beneficial and sometime detrimental to the minority shareholders. However, it is drafted in such a way as it becomes beneficial to both classes of Shareholders. Under Drag-Along, when the majority shareholders wish to sell their shares to a third party, they can force the minority shareholders to join them under the same price & terms to ensure a clean exit.
Tag-Along Right (Co-Sale Right): It gives a right to the minority shareholders to join the majority shareholders in case the majority shareholders wish to sell their shares to a third party. Tag-Along Right is beneficial to the minority shareholders because minority shareholders can force the majority shareholders by joining them on same price & terms and minority shareholders don’t need to find another better deal.
Non-Compete Restriction clause: This is commonly found in the Shareholder Agreement which restricts the existing shareholders from carrying out any rival activities during and after their tenure as a shareholder. The rationale behind such restriction is the Trade Secret and company’s intellectual property which is crucial for a business. Not having a competition clause may become a disaster for a company in future.
Dispute Resolution Clause: Dispute is inevitable in todays’ scenario and it makes important for a Shareholders Agreement to include a Dispute Resolution Clause or a Deadlock Resolution Clause. This clause-set out the manner in which a dispute would be addressed and will be resolved ensuring win-win situation to all parties. It may include “Put Option” or “Call Option” clause whereby the shareholder has a right to “buy or sell” their stake to other existing shareholders at a pre-determined price.
Liquidation Preference: This is one of the most notorious clauses used by venture capitalists. Liquidation Preference clause gives the investors a preference in recovering their investment in if the company is dissolved or sold. Sometimes the investors may demand for 2x or 3x preference which means they get a right to recover twice or thrice of what their investment is. This results in other shareholders receiving small amount upon an exit.

Post Incorporation Compliance Of Newly Formed Companies

admin — Wed, 20 Sep 2023 06:01:06 +0000

In today’s scenario incorporation process of company has become easier under ease of doing business but after the incorporation some mandatory compliances has to be followed by companies under Companies Act, 2013. Every Company has to know and must followed the compliance unless legal cost imposes and its not good for the reputation of the company. Designated officers of the company must be aware of the law and must comply with the same as ignorance of law, excuses no one.

The company has to comply with following requirements after the incorporation

1. First Meeting of the Directors of company

Post incorporation, every company requires to hold its first meeting of the Board of Directors within thirty days of the date of its incorporation to discuss urgent matters like declaration of commencement of business, Appointment of first Auditor too.

1. Commencement of Business

As per section 10A of the Companies Act, 2013, the company is required to file a declaration in Form INC-20A with in period of 180 days of its incorporation stating that every subscriber to the memorandum has paid the subscription amount of the shares agreed to be taken by him on the date of making of such declaration which should be verified by a CS or a CA or a CWA in practice.

1. Opening of Bank Account in the Name of the Company

After incorporation, it is mandatory to open current account in the name of the company with any bank in India. Documents required for Opening of Bank Account include COI, MOA & AOA, PAN Card of Company, KYC docs of Directors etc.

1. Appointment of First Auditor

Within thirty days of their registration the Directors of Company are required to appoint first Auditor to hold the office till the conclusion of the first annual general meeting. In the case of failure of the Board to appoint such auditor, shareholders of the company appoint within ninety days at an Extraordinary General Meeting.

1. Verification of Registered Office (Form INC-22)

Normally the Registered Office is maintained from the incorporation itself which is capable of receiving and acknowledging all communications and notices but in cases where Registered Office is not maintained, in such cases the company is required to furnish to the Registrar verification of its registered office within a period of thirty days of its incorporation in Form INC – 22 along with the fee as provided under the Companies (Registration offices and fees) Rules, 2014.

1. Issuance & stamping of Share Certificate:

Section 56(4)(a) of the Companies Act 2013 states that, every Company is required to issue Share Certificate within a period of two months from the date of incorporation, to the subscribers to the memorandum. After issuance of Share Certificate, stamping of shares are also required to be done.

1. Statutory Register

Every Company require to maintain a Statutory Register containing information like a Register of Members, Directors, Charges, Debentures, Related Parties and other matters pertaining to the shareholders and management of the company. All Registers must regularly be updated and maintained at the Register Office of the company.

Appointment of Managing Director Process And Draft

admin — Wed, 20 Sep 2023 05:23:33 +0000

As we Know, a Company is a legal person, which is managed and controlled by group of individuals called board of directors. Among the directors, an individual appointed to handle various important work, fulfil stakeholder’s expectation and maximise the wealth of the company, that individual can be termed as Managing Director of the Company. Every Listed Company and every other Public Company having a paid-up capital of rupees Ten crore or more is reqruied to have whole-time Key Managerial Personnel. Legally, sub-section 54 of Section 2 of Companies Actm 2013 defines a Managing Director as:

a director who
by virtue of the articles of a company or
an agreement with the company or
a resolution passed in its general meeting, or
by its Board of Directors,
is entrusted with substantial powers of management of the affairs of the company and
includes a director occupying the position of managing director, by whatever name called.

Under Company law various provisions deal with appointment of Managing Director such as:

Appointment and Remuneration of Managerial Personnel, Rules 2014,
Appointment and Qualification of Director, Rules 2014
Meetings of Board and its Powers, Rules 2014.

CONDITIONS FOR THE APPOINTMENT OF MANAGING DIRECTOR

No company shall appoint or continue the employment of any person as Managing Director, whole-time director or manager who

is below the age of twenty-one years or has attained the age of seventy years;
is an undischarged insolvent or has at any time been adjudged as an insolvent;
has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or
has at any time been convicted by a court of an offence and sentenced for a period of more than six months.
he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand rupees, for the conviction of an offence under the Act mentioned in Schedule V of the Companies Act, 2013, some Acts mentioned below, for list refer schedule V of the Act:
the Indian Stamp Act, 1899;
the Central Excise Act, 1944;
the Industries (Development and Regulation) Act, 1951;
the Prevention of Food Adulteration Act, 1954;
the Essential Commodities Act, 1955;
the Companies Act, 2013 or any previous company law;
the Securities Contracts (Regulation) Act, 1956; etc.
he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
he is resident of India.

Note: Resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India,

for taking up employment in India; or
for carrying on a business or vacation in India.
This condition shall not apply to the companies in Special Economic Zones as notified by Department of Commerce from time to time

Question: Whether Non-resident can become a Manging Director in India? Answer: A person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such person shall be required to furnish, along with the visa application form, profile of the company, the principal employer and terms and conditions of such person’s appointment. PROCEDURE FOR APPOINTMENT OF MANAGING DIRECTOR

Steps Procedure
Documentation Take prior consent from the incumbent inform DIR-2 along with a declaration that he is not disqualified to become a director under the Act in Form DIR-8.Approval of Board The Directors shall hold a Board Meeting:
To Obtain approval of Board for appointment of Managing Director
To approve the terms and conditions on which MD is proposed to be appointment.
To fix the date, time and venue of General Meeting to get approval of shareholders by passing Resolution.
Filling of Forms with ROC Following Forms are required to be filed with ROC after passing Board Resolution:
DIR-12 within 30days of passing of Board Resolution.
MGT-14 within 30days of passing of Board Resolution.
MR-1 within 60days of passing of Board Resolution.

Convene General Meeting & pass Special Resolution Issue 21 days clear notice to hold General Meeting and pass a Special Resolution for appointment of Managing Director Filing of Form MGT-14 Within days of the passing of Special Resolution OTHER PROVISIONS FOR APPOINTMENT:

No company shall appoint or employ at the same time a Managing Director and a Manager.
No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time except Government companies.
No re-appointment shall be made earlier than one year before the expiry of his term.
The minimum & Maximum age for appointment as MD is 21 years and 70 years respectively.

Draft of Minutes of Board Meeting:

MINUTES OF THE MEETING OF THE NOMINATION AND REMUNERATION COMMITTEE OF M/S (NAME OF COPMANY) HELD ON THE (DATE) DAY OF (MONTH), 20(YEAR) AT THE REGISTERED OFFICE OF THE COMPANY AT (REGISTERED OFFICE) AT (TIME)

PRESENT:

1) X (Executive Director)

2) B (Non-Executive Director)

3) N (Independent Director)

1) CHAIRMAN:

Mr. B, an Independent Director being elected as a Chairman of the meeting on unanimous vote took the chair.

2) LEAVE OF ABSENCE:

There has been no leave of absence. 3) QUORUM: The chairman after welcoming the members, considered the requisite quorum present declared the meeting open for discussion.

4) MINUTES OF THE PREVIOUS MEETING:

The minute of the previous committee meeting held on 30/11/2019 was circulated, considered, noted and signed by the chairman.

5) NOTICE

The notices placed before the members were considered and the matters were taken up chronologically.

6) APPOINTMENT OF (DIRECTOR’S NAME WITH DIN) AS A MANAGING DIRECTOR (WHOLE TIME KEY MANAGERIAL PERSONNEL):

The Chairman apprised the members that the Board of directors of the Company has referred the name of (Director’s name with DIN) which was proposed by Mr. __________________ for the appointment as an executive Managing Director of the company w.e.f _______________ as per the requirement u/s 196, 197 and schedule V of the Companies Act, 2013 and also for the smooth functioning of the company since the tenure of the existing executive Managing Director of the company shall expire on the (date). Considering the requirement of the company and the past experiences the committee members/Board has passed the following resolution unanimously: “RESOLVED THAT pursuant to the provisions of sec 196, 197, 203, Schedule V and any other applicable provisions of the Companies Act, 2013 read with Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 (including any statutory modification or re-enactment thereof), the Nomination & Remuneration Committee recommends the appointment of (Director) (Din: ________) as the Managing Director (Whole Time key Managerial Personnel) of the company for a term of five years commencing from (date) till (date) subject to the appointment made by the Board of directors at the Board meeting and thereafter approval of the shareholders in the ensuing Extra-Ordinary General Meeting as per the terms and conditions mutually agreed upon between the Company and (Director).