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Shareholders Agreement

Shareholders Contract: Role of Directors and the Board

In this article, we shall see how we can draft a shareholders Contract, directors' roles, and the board. know everything about it

A shareholders Contract is a legally binding contract between shareholders and directors of a company. It specifies key aspects of the company’s management and operations. 

These include:

  • Shareholders‘ and directors’ roles and responsibilities
  • How board meetings will be conducted entering and leaving the company
  • How important decisions will be made by the company.

If you are forming a company with more than one shareholder, it is important to draft a shareholder’s contract. Likewise, you want to make sure this agreement is tailored to your company’s best interests and considers its future goals. An overview of what a good shareholders agreement covers concerning its directors is provided in this article.

Responsibilities of Shareholders

In an attempt to ensure smooth operations of the company, the shareholder agreement is written to prevent conflicts between shareholders. Some rules and regulations govern how officials are appointed and how administrators are terminated. Since administrators or shareholders can exert efforts during the term of the corporation, this contract should be very specific. 

Number of Company Directors 

A shareholders contract should indicate the number of company directors and the names of all current directors at the time of signing. The shareholder’s agreement should also state the maximum number of directors that can serve at any one time.

The maximum number depends on your company’s plans. You may add new directors as the company grows. You must always comply with the maximum number stated in the shareholder’s contract to do so.

It’s always a good idea to talk to a corporate lawyer about your company’s particulars. You can get tailored advice from a professional on arranging a shareholders contract. Vakilsearch can draft your shareholder agreement and clarify any doubts or worries you have.

Appointment of Directors to the Board

In your shareholder’s contract, you should also outline the procedure for appointing (and removing) directors. There are many ways in which your company can appoint a director.

 Here are two common methods:

  • Shareholders passing a special resolution requiring a majority vote to approve the appointment of a director
  • Any shareholder is holding a certain percentage of shares.

There is no right or wrong answer here. This is essentially a commercial decision for the shareholders.

From terms to protection – we’ve got your shareholders agreement covered. Click here for customizing your Shareholder Agreement for Indian markets!

Removal of a Director

Moreover, the shareholders contract should also outline how a director can be removed from the board. Your company should closely follow each step to avoid issues or disputes. 

You may remove a company director for a variety of reasons, including if they:

  1. Breach of their director duties
  2. Breach a material clause in the shareholder’s contract
  3. Convict of a severe crime. 

Detailed information on what constitutes a ‘serious office’ can be found in the Companies Act 2013

A company’s decision on how to remove a director is purely commercial. Notice of any breach should generally be sent to the director by your company. The director should also have the opportunity to remedy the breach. No matter what procedure your company decides on, you need to outline the whole process in your shareholder’s agreement.

Making Important Decisions

A key feature of the shareholders contract is that it specifies how important company decisions are made. The shareholder’s agreement will clearly state the percentage of votes needed to pass a resolution. Furthermore, you may be required to give written notice to the directors, allowing them to make decisions on certain matters affecting the company. The shareholder’s contract will also outline what happens if there is a deadlock. This is a commercial decision made by the company. 

The Role of Directors

  • Directors usually sign the shareholders’ contract on behalf of the company. However, they may be co-signers and one or more shareholders on behalf of the company
  • If a director signs a shareholders’ agreement on behalf of the company, they represent the company and all its shareholders
  • The agreement may also state that the company will donate certain shares to a charity if certain conditions are met
  • Directors may be held personally liable for a company’s debts if the company goes into financial difficulty 
  • This can occur if the company does not have enough money to pay its obligations to its shareholders
  • The shareholders contract can protect the company from such situations by setting out the duties of the board of directors and the protection that shareholders receive if a director fails to perform their duties.

What You Need to Know?

While shareholders own the company, directors run it. Therefore, the shareholder’s contract should clearly spell out the responsibilities of director of a company  and how board meetings are to be conducted. In the end, you want to prevent any potential disputes or misunderstandings between the director  and shareholders. Get in touch with Vakilsearch to get a shareholders contract drafted.

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