Check out this blog to know all about how a shareholders agreement can be changed.
The purpose of a shareholders agreement is to help protect the current shareholders’ interests from being abused by any management in the company at any time. Know more about Changing a Shareholders Agreement!
In case the management changes or the company itself gets acquired by some other entity, this agreement will safeguard specific decisions, like the distribution of dividends and issuing new stock or debt.
A shareholder contract covers several matters, such as shareholders’ issues, valuation of shares, rights of minority shareholders, company’s management team, limitation on the authority of the management team, voting of shares of stock, share transfer restrictions, and additional shares allotment. This agreement is protection for shareholders and serves as a reference document in case of future disputes.
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What is a Shareholders Agreement?
A Shareholders Agreement is a type of arrangement in which the relationship between a company and its shareholders is clearly defined.
It is designed to safeguard the rights of the minority and majority shareholders, specify their obligations, and ensure fair treatment of all shareholders. Continuing shareholders are protected by the shareholder’s contract from decisions of future management or in case the company gets sold.
While a shareholder’s contract is basically designed for the protection of each and every shareholder, it is still of greater importance to minority shareholders as it defines the obligation of the majority shareholders to protect the minority shareholders from being abused and give them a voice during the time of making key decisions.
Possibility of Making a Change in a Shareholders Agreement
The main thing to understand is that a shareholders agreement is just a contract created between a company and its shareholders.
Therefore, just like any contract, a shareholder’s contract can also be changed or modified when changes happen in the company. The changes will have to be done based on all parties associated with the shareholder’s contract agreeing to the change.
How Easy Is It to Change or Amend a Shareholders Agreement?
In case the shareholders are in dispute already and find no benefit in renegotiating and amending the shareholder’s contract, then a problem could arise.
Nevertheless, when amending a shareholder’s contract or creating a new one, the approach to it is proper, and then a dispute can also be overcome.
In case of a dispute, if a reassessment of the agreement is done by all of the parties, it might become useful in confirming and clarifying each party’s expectations and making sure that all expectations and roles are clearly defined so that no disputes come up in the future.
A large number of disputes that arise between a company and its shareholders and the officials of the company are due to communication breakdowns and differences in expectations.
Instead of going in for other, more serious remedies that a shareholder can use, it might be preferable for a company and its shareholders to discuss with each other and resolve the problem by making a change or amending the shareholder’s contract.
Why to Change a Shareholders Agreement?
Generally, a shareholder’s contract is created in a company quite early. As the company evolves, progresses, and grows, the existing shareholder agreement could become outdated and not suitable to the current circumstances of the company.
Oftentimes, when capital is raised by a company, the investors could request certain changes be made to the company’s shareholder’s contract. This request is generally made so that the investors have greater rights and are able to protect their investment in a better way.
Considering and Confirming Changes in the Shareholders Agreement
Based on why a change is being considered in the shareholder’s contract, the first thing to do is look at the proposed amendment and consider whether it really needs to be made.
Generally, this confirmation becomes relevant where the change is being considered when a new investor is being onboarded. In case the changes have been requested by the investor, it is essential for the company to carefully study the requested changes and properly negotiate them with the investor to ensure that the interest of everyone is protected. The changes should in no way be unreasonably disadvantageous to the company and to its current shareholders.
On the other hand, if the company is making just operational changes to the shareholder’s contract, considering the changes would generally be ne less relevant. Yet, it is a good practice to ensure that the changes are intended to be made to the contract.
Importance of Checking Existing Agreements Prior to Amending
Generally, a shareholder’s contract incorporates the process that will be used to amend or change that shareholder’s contract.
Typically, any change that is made in a shareholders agreement will require that each one of the shareholders provides a written agreement in favour of the change or if there is any other consideration for the change. That is why it is essential to check the shareholder’s contract specific to the company to know what requirement has been laid out.
Making the Change in the Shareholders Agreement
Generally, a change can be incorporated into a shareholder’s contract by getting all of the shareholders to in writing agree to the change. Instead of getting an entirely new shareholder’s contract signed, it is easier to get each shareholder to sign a deed of variation.
A deed of variation is a document that sets out all of the relevant changes to the shareholder’s contract that have been proposed.
After it has been signed by everyone concerned, the changed or modified shareholder’s contract comes into force as it replaces the previous agreement.
Conclusion
We hope that this article has been helpful in providing information on changing a shareholder’s contract. It is important to remember to put the process of amending the shareholders agreement itself so that there is clarity on how the change is to be made. Visit Vakilsearch to find similar informative articles. Browse through the website and contact the expert legal team to get help on any legal matter.
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