Have you ever considered getting your company’s Shareholder Agreement amended but ended up with more concerns instead? If yes, this guide covers everything you need to know about how to amend a Shareholder Agreement.
Within a business, shareholders are interested in development. As and when the company gets profitable, the shareholders’ stake intensifies. The company and its shareholders enter into a contract that regulates their internal relationship and lists down safeguards for the investors. The purpose of this agreement is to protect the interests of shareholders including minority-right shareholders. Thus, all shareholders would agree to an amendment to the Shareholder Agreement only when it is either in their favour or the company’s favour.
Investors focus on wealth maximisation. In the case of an incoming shareholder, rights and benefits available to the existing shareholders should not turn disadvantageous. Amendments to the shareholders’ agreement cannot be carried out in a haphazard manner as per the whims and fancies of the company.
If you are an entrepreneur of a startup worrying about drafting a Shareholder Agreement, Vakilsearch can help you create one that requires minimal amendments in future. Their lawyer-drafted agreement ensures that your company’s contract with the shareholders is tailor-made and written as per your specifications. A first draft of the agreement would be shared no longer than within 5-6 days of choosing Vakilsearch The best part is that you get to make two iterations to the draft at no additional cost. Isn’t it the most value-adding and trustworthy feature? Consult an expert now!
Why Should You Enter Into a Shareholders’ Agreement?
- A shareholders’ agreement reflects the stability of the business in the eyes of its stakeholders; namely the government, users, customers, and creditors. It develops a feeling of trust in potential investors by emphasising healthy relationships among shareholders
- The agreement enlists covenants to protect the company’s interests when shareholders sell their stakes to exit the company
- Barring the administrative and operational decisions with are dealt with by the Board of Directors, a major decisive control lies with the shareholder.
- It consists of a predefined set of dispute-resolution mechanisms likely to occur in the future in case of amendments.
Cases When Shareholders’ Agreement Undergoes a Change
A shareholders’ agreement prevents chances of disputes with the management over a period of time with respect to exercising their rights. It may even include provisions prohibiting minority shareholders from transferring their shares to big competitors resulting in the depletion of the company’s wealth. A company’s business keeps scaling according to the passage of time. A shareholders’ agreement is usually entered into by the company in an early phase of the company’s life cycle. At times, the upscaled business attracts shareholders’ attention to improving their rights. On the introduction of further capital, investors may choose to demand a change in the distribution of dividends and investments.
Minority shareholders create minimal impact on the management of the company owing to their low voting share. Amendment to the shareholders’ agreement creates a level playing field for minority shareholders by requiring the management to take corporate decisions on approval by all shareholders. This makes sure that the opinions of minority shareholders are not invalidated while deciding important matters relating to the company. Know more about this exclusively on Vakilsearch, the legal platform for minority shareholder-related issues.
Action Plan to Amend the Shareholder Agreement
It is imperative to pay keen attention while drafting a shareholders’ agreement. The provisions for amendment stated during incorporation would need to be followed in the future. It facilitates conditions when an agreement can get amended minutely without having to draft a fresh agreement..
Step 1: Determine Whether the Change is Necessary
A change undertaken to facilitate an incoming investor should not prove disadvantageous to existing shareholders. Every amendment proposed should be carefully reviewed as the same has long-lasting consequences on the company’s vision, mission, goals, and strategies. This would even answer your primary question: Do we need to change the Shareholders’ Agreement? In a case where the change relates to operational business activities creating low or as good as no impact on the investor’s wealth and rights, such consideration may not be made on a serious level.
Step 2: Take Management’s View into Consideration
Directly approaching shareholders for major amendments may lead to disputes between the management and the investors. A thorough examination of the ‘need and result’ is required to ensure a smooth amendment process.
Step 3: Check the Existing Shareholder Agreement
You will be amazed to learn that the solution to your problem lies right in front of you. The existing shareholder agreement would contain a clause focusing on amendments to be made in a certain way. It would enlist steps to be followed in case amendments are necessary to the existing agreement along with its consequences.
Step 4: The Power of Unanimous Vote
In many cases, a shareholders’ agreement can be amended only when all shareholders provide consent to the same. This means that if any shareholder abstains from voting on the resolution for amendment, the said subject matter cannot be passed.
Step 5: Pay Attention to Technical Nuances
A shareholders’ agreement is a compilation of terms and rules which need to be crisp and clear. In legal terms, every next word could have different meanings based on the way it is interpreted. To avoid confusion and disputes, the amendments made need to be conclusive, necessary and specific. Don’t hesitate to approach Vakilsearch in order to avoid technical hassles.
In order to understand which terms of the agreement need to undergo a change within the permissible limits of the law, a corporate lawyer needs to be consulted. Their case-specific analysis would take into consideration your business structure and provide real-time apt legal pieces of advice.
Remember to consult a lawyer at Vakilsearch while drafting a shareholder agreement right at the beginning. This would avoid the need to amend a shareholder agreement in the future owing to omissions or mistakes. While guiding you through recommendations for your business, they would be able to correctly amend a shareholder agreement as per requirement.We’re confident that our legal and professional services will mark every doubt off your checklist. Get in touch with us to schedule an appointment call right away.