SHAs: Binding without incorporation into the AOA

By: Amrita Sachidanandan, Advocate

INTRODUCTION

As the entrepreneurial age of the country has arrived and young professionals are entering the business world, many startups are emerging, and capital backing is the main objective for any business or company to set up a successful company. For achieving the desired objectives and setting up a venture, investments are needed. The investors, in order to safeguard their money invested into a company, require specific stakes of the company and also need rights in the decision-making of the company. The documentation which captures such rights and obligations of the investors and company is referred to as the “transaction documents”. Transaction documents include shareholders’ agreements, share purchase agreements, term sheets etc.

SHAREHOLDERS AGREEMENT

A typical sort of agreement that the Company and its shareholders participate in is a shareholder agreement. lderinyou’reChainAdHaReHo agreements are created when a range of investors invest in a company, as has been the case recently. These agreements are frequently DM when shares are transferred or rep, among other situations. Shareholders& ‘ agreements are one of the essential contracts that the company and shareholders enter into to define their rights and obligations because shareholders are regarded as the genuine owners of the company. Such agreements& ‘ primary goal is to resolve any potential conflicts between shareholders and the corporation.

The shareholders&ai agreement is meant to ensure that shareholders are treated fairly and that their rights are upheld. Parts of the agreement that describe how shares should be priced reasonably and legally (f when sold) are included. Additionally, it gives minority positions protections and shareholders the ability to decide who may or may not become future outside shareholders.

capitalisation ‘Any restrictions on the transfer of shares, pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the event of a new issue), and information on payments in the event of a company sale are all included in a shareholders' agreement. A shareholders' agreement also typically includes a date, the number of shares issued, a capitalization table outlining shareholders and their percentage ownership, and the number of shares issued.

ARTICLE OF ASSOCIATION

One of the practical and critical prerequisites for incorporating the company is having a set of articles of association. It is a document that outlines the policies and procedures that aid in daily operations and establishes the goal of the business. This document provides the rules that regulate noir internal activities, including the rights of shareholders, the directors’ authority, the issuance and forfeiture of shares, etc. The relationship between the shareholders, the company, and its directors is also established, as is the degree of influence those parties have over the company.

Company bylaws are different from shareholder agreements. The legal framework of a company and the rules that control its activities are formed by the bylaws in conjunction with the articles of incorporation. On the other hand, a shareholder agreement is optional. This document, which outlines specific rights and obligations, is frequently created by and for shareholders.

The shareholders’ agreement and the articles of organisation frequently dispute with respect to the rights and obligations of the shareholders. This is usually due to the requirement that any agreements made between the parties comply with the Companies Act, the articles of organisation, and the memorandum of association. The rights and obligations of the parties are typically spelt out in the shareholder’s agreement when parties ag. However, they are not always represented in the articles of association. One of the reeCR papers for the company’s constitution and incorporation is the Articles of it. According to previous rulings, the terms of the articles of association take precedence when there is a contradiction between the two agreements.

The very first judicial pronouncement relating to the overriding effect of articles and shareholders’ agreement was made in the case of V.B. Rangaraj Vs. V.B. Gopalkrishnan & Ors., the question of whether the clauses of shareholders agreement are enforceable even if they are not mentioned in the articles of the company. It was opined by the Supreme Court that the clauses of shareholders’ agreement, even if they are in accordance with the Companies Act but are not mentioned in the articles of association, cannot have a binding effect till the time they are expressly mentioned in the articles of the company.

Further, in the Vodafone judgement AIR, the Supreme Court held that the clauses of shareholders’ agreement till the time they are in accordance with the Company law and not contrary to the articles of the company shall have a binding effect on the parties to fulfil their rights and obligations. The court further stated that shareholders can enter into any kind of agreement in the best interest of the company only till the time the provisions of the shareholders’ agreement are not contrary to the articles of association of the company.

In the case of World Phone India Pvt. Ltd. S WPI Group Inc., the shareholders of the company entered into a shareholders’ agreement wherein affirmative rights were granted to ll Vs the shareholders’companiesshareholders sametinot mentioned under the articles of the Company. The Delhi High Court held that the provisions of the Ahi agreement, though silent in the articles of the t.and not in contradiction with them, will not be enforceable.

Conclusion

It is clear from the rulings above that the articles of organisation take precedence over the shareholders’ agreement. However, if there is no specific provision in the articles of organisation, it is unclear whether the terms of the shareholders’ agreement will be enforceable. In order to have a binding effect and legal sanctity in case any later issues occur, it is crucial to include all the provisions of the shareholders’ agreement (or any other transaction agreements) in the articles of association of the Company.