The capital of a company is divided up into a small number of parts known as shares. An ownership stake in a company is denoted by shares. To raise the money required for the company’s daily operations, these shares can be sold on the open market. A person who purchases even one share in a company is considered a shareholder (or stockholder) of that company. Shareholders are the owners of the company because they invest money in the company’s operation, and whatever gains or losses the company makes directly impact their ownership stake.
The shares of the company can be bought or sold by its shareholders. As outlined by the Companies Act of 2013, they have certain rights and obligations. Agreements between shareholders and the company or other investors are referred to as investment agreements and are necessary for the sale or purchase of company stock.
Although there are many different kinds of investment agreements, the Shareholders’ Agreement (also known as the SHA) and the Share Purchase Agreement (also known as the SPA) are the two most common forms.
A contract between a company and its shareholders, or between a company and a specific class of shareholders, is known as a shareholders’ agreement. The conditions of this agreement may be kept secret and confidential as there is no need to register it with the registrar of the company. If there are any differences between the shareholder’s agreement and the company’s articles of association, the latter will take precedence. It is possible to execute a shareholders’ agreement at any point while the business is operating. The company’s shareholders typically get along well with one another. However, in order to maintain this peace and prevent conflicts, it is essential to put all of the rights and responsibilities of the shareholders into a written agreement and specify how disputes will be resolved.
When a Shareholders Agreement (SHA) is required?
A shareholder’s agreement is required when forming a corporation with more than one person making financial contributions to the company. To prevent any issues or misunderstandings during the company’s formation, this agreement should be drafted and signed as soon as the corporation is incorporated. It should be signed by all investors, even if the company only has a small number of them. This is because a SHA would protect everyone’s rights and interests and guarantee that there is always a simple, unbiased means to settle disagreements. Even if a corporation has articles of association that outline the laws and regulations for the company, it is still a good idea to have a shareholder’s agreement for additional clarity and security.
SHARE PURCHASE AGREEMENT
A contract between the buyer and seller of shares (i.e., the company and the shareholders) is known as a share purchase agreement. It is an official contract that contains all of the terms and conditions related to the buying and selling of the shares. Prior to the transaction or share exchange, the share purchase agreement enables both parties to protect their interests. Usually, when an investor is being brought into the business, this agreement is made. Such an agreement often lays out the details of the kinds of shares purchased, the number of shares purchased, the buyer and seller’s rights and obligations, etc. This is a legally enforceable document that also acts as evidence for the company’s shareowner.
When is a Share Purchase Agreement (SPA) Required?
For any transaction involving the acquisition or sale of company shares from another company or individual, a share purchase agreement is required. For example, if two partners have equal interests in a company, one partner could use a share purchase agreement to buy out the other partner’s investment.
A share purchase agreement includes information about the company whose shares are being transferred, the buyer and seller of the shares, the shares’ kind, quantity, and payment, as well as information about the laws that apply. A payment schedule and the agreement’s closing date are also included in this contract.
Key Differences Between These Agreements
The critical difference between the share purchase agreement and the shareholders’ agreement are as follows:
1. SHARE PURCHASE AGREEMENT
2. SHAREHOLDERS’ AGREEMENT
Need of Such Agreements
Investors who invest their hard-earned money in the company’s business require assurances regarding the business’s achievements and results. Shareholders need certain privileges and power within the company to protect their investments. These agreements aid in settling future conflicts that may arise between the company and its shareholders, as the company’s future is unpredictable.
Establishing the rights of the shareholders and guidelines for controlling the company’s business operations it aids in preserving the relationship between the shareholders and the company and, as a result, protects their interests.
Based on the information provided above, it is clear that protecting the interests of the company’s investors or shareholders requires the implementation of both the shareholders’ agreement and the share purchase agreement. The primary goal of the agreements is to safeguard the company’s and shareholders’ relationships, protecting them from potential conflicts in the future.
Although these agreements aren’t a requirement of every company and its shareholders, they are essential in preventing future arguments and conflicts.