Month: October 2019

Competition law and Patent law are at conflicting ends, but a positive relationship between the two can be derived if a balance is achieved.

The world has long debated and unarguably still continues to debate about the co-existence of the IP laws and the Competition laws that are prevalent together in every part of the world. The debate revolves around the issue of whether one is detrimental to the effectiveness of the other or not. To gain a better understanding of this disputation and what possible amends can be made in order to strike a constructive balance, one needs to understand the two concepts individually. 

COMPETITION LAW:

Competition law is a law which basically stimulates and promotes the market competition in an economy by regulating the companies and industries which gain a monopoly in the market and are in a position to influence the market forces, other industries as well as consumers. Competition law, in a nutshell, aims to regulate the anti-competitive trade practices which are against the requisites of healthy competition. 

The Competition law in India is fairly new and is exercised through the Competition Act, 2002 and is enforced by the Competition Commission which was constituted in March 2009. 

PATENT LAW:

Different countries are governed by different patent laws. The patent laws empower the inventors by providing them protection relating to both the processes and products that are invented. 

When a product is produced, the patent safeguards the inventor by providing an undivided right which prevents other unauthorized competitors/ persons from making, using, selling or importing that product.

In the case of processes, the patentee receives a similar exclusive right to prohibit any unauthorized competitor/ person from using, selling or importing the process and the product that is produced by the process is also covered under the protection. 

In India, the law governing patents is the Patents Act 1970, along with the Patent Rules 1972, which came into force on 20th April 1972. 

RELATIONSHIP BETWEEN BOTH THE LAWS:

Both benefit consumers and foster economic growth: Competition and patent law both promote public welfare and act as catalysts in the boosting of the economy.

Through the competition policy, more firms and companies come forward and compete against each other to provide the newest innovations and efficient technological/biotechnological processes that are more cost-efficient in terms of manufacturing them, which can enhance their profits and competitiveness in the market. This helps both the industries in the economy and the consumers who are provided with the technology of their satisfaction. 

Also, through the patent policy, since the patentees are given protection for twenty years from the date of filing the patent application, more innovations are conceived which provide capital, among other incentives to the firms due to exclusivity and since novel information and technology is dispersed in the society, it benefits the consumers as well. 

Thus, they act to promote the same cause.

Patents can hamper innovation which in turn hinders competitiveness: In the case of questionable patents, competition may be obstructed in the areas where these patents have been awarded. For example, a questionable patent is such which contains claims that are extremely broad and include a lot of fields. So if a person patents an invention that comes in the ambit of the field in which patent has already been obtained, then it can block the patentee’s ability to exploit its own invention as it will end up infringing the property rights of the first patent i.e. the questionable one. Thus, this will dissuade competitors from making innovations where questionable patents are concerned. 

Unreasonable patents can arouse dissatisfaction amongst firms: Sometimes, patents are granted to those inventions that do not fulfill the paramount requisites on the basis of which patents are provided. Obvious and petty inventions, especially in the case of software technology are granted, which in turn cause vexation to the firms and vitiate the competitive mood. 

Questionable patents complicate business planning: Since questionable patents create an environment which is conducive to the creation of licensing difficulties, exorbitant royalties for the usage of the patented product and can create precariousness in the research and development area for firms, it complicates the business planning because firms need to now rack their brain on a whole new level to be able to create products which don’t infringe the property rights of other products that maybe so used in this process.

CONCLUSION:

The various facets of the relationship between the two laws have been spread out above which show us how their intermingling creates complication, consensus and conflict at the same time. However, in the light of the need to strike a balance between the two, competition law should be promoted but not at the cost of limiting anybody’s avenue for receiving a patent. 

At the same time, before granting questionable and invalid patents, patent application should be evaluated by third parties who have expertise in that field so as to grant patents only to very deserving inventions. At the same time, a legislation should be enacted that publishes all patent applications eighteen months after the filing of the patent so as to save the cost and energy of the competitor who can invest in designing a new product by being informed before-hand about the products that have been already invented. Furthermore, litigation should be fully-fledged open as a means to challenge and review patent claims. 

‘A tool to level the employment opportunities for all individuals’

An Affirmative Action plan or program is considered to be an organization tool structured to make sure that every individual gets an equal employment opportunity. A central idea underlying affirmative action is that with time, an employer’s workforce will usually demonstrate the gender, racial, and ethnic outline of the manpower from which the employer selects and employs.

Affirmative Action programs consist of a characteristic component that includes a number of quantitative methods that are designed to assess the framework of the workforce employed in a particular business unit and compare it to the structure of the related workforce. 

Affirmative Action programs also consist of action-oriented programs. If women and minorities are not getting proper employment opportunities at a rate to be expected given their availability in the related workforce in a business unit, the employer’s affirmative action program should include specific practical steps that are designed to tackle this problem of underutilization of a specific section of the workforce.

Constructive Affirmative Action programs must also include an internal examination and reporting systems as a method of calculating the employer’s progress towards achieving the workforce that would be expected in the absence of any discrimination prevailing.

An Affirmative Action program also assures equal employment opportunity by systematizing the employer’s adherence to equality in every aspect related to the employment process. Consequently, being a part of its Affirmative Action program, an employer observes and examines its employment selections and remuneration systems to assess the impact of those systems on women and minorities.

An Affirmative Action program is therefore much more than just a paperwork exercise. An Affirmative Action program includes those strategies, practices, and mechanisms that the employer implements to make sure that all applicants who are qualified enough for a particular post and the existing employees are receiving an equal opportunity for employment, selection, promotion, and every other term and perks associated with employment. 

Preferably Affirmative Action is an element of the way the employer conducts its business in a day-to-day basis. OFCCP (Office of Federal Contract Compliance Program) has found out that when an Affirmative Action program is addressed with this perspective being a powerful administration tool, there lies a positive relationship between the existence of Affirmative Action and the absence of discrimination in a business entity.

‘The internal rule book that every company must have and work by’

The articles of association is a record that identifies the rules for a company’s functioning and defines the company’s aim and lays down how tasks are to be performed within the organization which includes the process for appointment of directors and handling of financial records.

Articles of association also recognize the way in which a company will issue stock shares, pay dividends and assessment of financial records and the voting rights. This set of regulations can be considered as a user’s manual for the company as they outline the technique for completing the day-to-day operations of the company.

Essentials of ‘Articles Of Association’

The content of the articles of association and the precise terms used is very much dependent on various jurisdictions but the document is more or less similar everywhere. AOA usually consists of:

• Company Name

            The company must have a name as a legal entity and it must be mentioned in the articles of association. Generally, a suffix like “Inc.” or “Ltd” is used to denote that the entity is a company. 

• Purpose of the Company

The reason for the formation of the company must also be mentioned in the articles of association. 

• Share Capital

The number of shares and kind of shares that constitute the company’s capital are enlisted in the articles of association. 

• Organization of the Company

The legal framework of the company that includes its address, the number of directors and officers, the name of the founders and the original shareholders can be found in this section. 

• Shareholder Meetings

            It consists of provisions for the first general meeting of shareholders to be held and the regulations that will govern the following annual shareholder meetings are specified in this section.

Amendment in the articles of association

Any Company who is planning to make any changes to the Article of Association (AOA) of the company will have to conform with the provisions of Section 14 of the Companies Act, 2013 and any other provisions of the Act applicable including implementation of the conditions contained in the Memorandum of Association (MOA) of the Company.

A Company can amend its Article by means of addition, removal, moderation, replacement or in any other way suitable for them.

Steps for alteration:

1. Summon A Board Meeting:  Notice of at least 7 days.
2. Holding the Board Meeting: At the Board meeting, the following resolutions must be passed:-

• Get Approval of amending the Article of Association and suggesting the proposal for consideration of members by special resolution.
• Fixing the date, time, and venue of general meeting and asking a director or any other person to send the notice to the members for it.
• Section 101 of the Companies Act 2013 mentions about the issue of written notice of EGM, 21 days prior to the actual date of the EGM to:

• All the Directors.
• Members
• Auditors of Company

• The notice shall consist a statement on the business to be transacted at the EGM.

3. Calling a general meeting:

• Check the Quorum.
• Check if auditor is present and if he is not then Leave of absence is Given or Not. (Section- 146).
• Pass Special pledge [Section-114(2)]
• Approval of Amendment in AOA.

4. Filing and fees

File FORM NO.MGT-14 i.e. filing of Resolutions and agreements to the Registrar (section 117) along with the required filing within 30 days of the special resolution being passed with the given documents:-

• Certified True Copies of the Special Resolution with explanatory statement
• Copy of the Notice of meeting given to members with all the attachments
• A printed copy of the amended AOA

5. Follow up:
6. I) The Registrar then registers the amendment and issues a certificate, alteration is complete after issuing of certificate
7. II) Incorporation of amendment in every copy of the memorandum.

Effect of alteration of articles of association

Articles cannot be amended if the amendment is revolting to, or inconsistent with, any statute or it is defeating the provisions of any law. The articles cannot be changed to entitle a company to carry on an unlawful business.

A valid alteration is binding to all the members of the company whether they voted for or against it.

A provision of the Articles that has the effect of putting the company’s share capital to a limit of a fixed amount would have no effect as it is contrary to the Act. 

Strict provisions can be made in the Articles as long as they are not contrary to the provisions of the Act.

‘Legal responsibility of a corporation for criminal actions of its employees’

A corporation is a body that exists only by its employees. It can be held liable for the criminal acts of its employees only until the employees are acting within the scope of their employment and their conduct is for the interest of the corporation. Corporations must perform certain functions under the law. Failure to perform those functions can lead to criminal liability. There are certain basics that constitute corporate criminal liability test in general: 

(1) The employee should have an intention to benefit the corporation  

(2) Or the employee acts for his personal gain but as a result, the corporation ends up benefiting from the acts. 

However, the profit of the corporation necessarily does not have to be the sole reason behind the actions of the employee.

Corporate Criminal Liability – The Necessity:

In everyday activities, the corporations not only affect the lives of the individuals but also perform disastrous acts that constitute a crime. Despite so many disasters, the law was relentless to impose criminal liability upon corporations for a very long time. The reasons being:

• Corporations cannot have the mens rea (guilty mind) to commit a crime
• Corporations cannot be imprisoned.

Circumstances for imposing criminal liability 

• Disregard in obeying decrees and other court orders
• Bribery
• Conspiracy to bribe officials
• Illegal medicinal practices 
• Creating public nuisance
• Violations of licensing and regulatory statutes
• Violation of consumer protection laws
• Antitrust law violations

Scope of employment

The employee must have an actual or apparent authority to act within the scope of his or her employment to get involved in a specific act. Apparent authority is when he or she indulges in an act that a third party could rationally believe he or she is the authority who is supposed to perform. Actual authority is when a corporation intentionally assigns to an employee, the authority. Generally, if a reasonable relationship can be shown between an employee’s criminal act and his or her corporate functions, there are chances of the corporation being held criminally liable for the employee’s conduct.

Punishments imposed

A corporation cannot be confined or punished like individuals but there exists techniques to punish a corporation like

• Heavy penalties
• Loss of business license(s)
• Regulation by government agencies
• Loss of government contracts
• Shareholder suits
• Permanent or temporary loss of deposit insurance, conservatorship, and receivership.
• Revocation of corporate charter by state authorities

Assessing Theories of Corporate Criminal Liability

The majority of corporate criminal liability theories are based on common law been constructed on the basis of cases. 

• Accomplice liability theory: When a corporation is held criminally liable, the responsibility falls on individuals too. If an individual is found to have aided, encouraged, assisted, or instructed other employee to commit a criminal act, they are held liable for the employee’s criminal act. 
• Agency Theory: under this theory, the corporation is liable for the intentions and acts of employees. It is based on the assumption that criminal violations normally require two elements- actus reus(wrongful act) and mens rea(guilty mind). 
• Identification Theory: it is based on the principle of detection of the guilty mind i.e. the identification of the individual who will be recognised as the company, who will be the company’s key mind.
• Aggregation Theory: under this, the combined fault of various individual faults, each of which lacks the required mens rea, is charged to the corporation. 

Corporate Criminal Liability In India

Criminal Liability is put only on those acts in which there is a violation of Criminal Law which prohibits certain acts or omissions. The basic rule of criminal liability is expressed in Latin maxim actus non facit reum, nisi mens sit rea. It implies that a wrongful act can only constitute crime, if done with guilty mind. Although this principle is applicable to all cases of criminal nature but the criminal law jurisprudence has mentioned an exception to it in form of doctrine of strict liability in which the presence of guilty mind is not responsible to constitute a crime, for example, in cases of mass destructions through pollution like grave negligence of the company leading to widespread damages (Bhopal Gas tragedy).

Statutes in this respect are-

• Section 141 of negotiable instruments act 1862
• Section 7 essential commodities act
• Section 276-B of income tax act

Rights and liabilities of the entity that acts as the holder of debenture stock for the interest of another party

A debenture is a type of formal loan given to the company by another individual. The company is then under an obligation to reimburse the loan within a specified period of time with interest.

A debenture trustee is an individual who is responsible for issuing and distribution of debentures. He/she is a person or entity that acts as the holder of debenture stock for the interest of another party. When a company is thinking about raising capital, one of the methods of doing so is by issuing stock in the form of debt with the obligation to reimburse the debt at a specific interest rate. The trustee acts as a liaison (a person who keeps in touch with different groups) between the company that provided the debentures and the holders of the debenture who are collecting interest payments.

Following the SEBI Rules, 1993- “debenture trustee” is a trustee of a trust deed for obtaining any issue of debentures of a body corporate [section 2 (bb)]. This is applicable to public companies only.

Eligibility for a debenture trustee 

To serve as a debenture trustee, the entity must either be a scheduled bank carrying on commercial activity, a public financial organization, an insurance company, or a corporate body. The entity must be registered with SEBI to act as a debenture trustee. All appointment of the debenture trustee(s) should be made under section 71 of the Companies Act, 2013.

Rights

• A company cannot issue debentures prior to the appointment of a debenture trustee in any case.
• The company cannot issue debentures previous to obtaining the assent of the debenture trustee.
• The company has to particularize the name of the debenture trustee in the recommendation letter.
• The debenture trustee can ask for regular performance report of the company
• The trustee can ask for reports related to the use of funds raised through the issue of debentures.
• The trustee can immediately communicate the debenture holders’ defaults, if any, regarding the payment of interest or recovery of debentures and consequently the action taken by the trustee.
• The trustee can designate a nominee to board of director of the company.
• Before the trustee designates the nominee the following conditions must be satisfied:                                            1. Two consecutive non-payment of interest to the debenture holders or

2. Default information of security for debentures or default in the recovery of debentures

Liabilities

• No one can be nominated as a debenture trustee if he has a share in ownership in the company.
• He cannot be appointed if he is a proponent of the company, an employee or the manager.
• No appointment for Creditor to the business.
• The post of the debenture can be filled by the company with the consent of the other trustees.

Duties

• The trustee makes sure that there is no contravention in the terms of issuance of debentures.
• The debenture trustee can take steps to provide a remedy for the breach.
• The trustee is the person who makes the debenture holders aware of such contravention.
• The trustee makes sure that all the condition with regard to the creation of security for debentures is met
• The trustee summons the gathering between the company and the debenture holders
• The trustee is an individual who assures that the debentures are retrieved as per the conditions agreed upon.
• The trustee can take steps to sort out the dispute arising between the company and the holders
• The trustee has to take essential steps to assure the interest of the debenture holders are met.

‘How illegal reproduction of work influence the profitability of businesses’ 

Piracy is the unlawful reproduction i.e. either copy or forging of work (software, recordings or motion pictures). Piracy has become easier with the advanced evolution of technology and more prevalent at the same time. Secured music can be downloaded from the Internet without actually paying for it. Cheap workers can easily set computer software by reproducing the design following the original software. Even though most people know about piracy, many don’t fathom its impact.

Effects of piracy-

• Distribution Methods: pirated items are distributed in two ways. Firstly, consumers buy pirated items not knowing that they are pirated and secondly when they buy pirated items knowing they are pirated. When consumers buy the items unaware of the fact that they are pirated and afterward when they come to know about it, it leads to a reduction in consumers’ confidence in the company, it further may lead to a reduction in the distribution of items of that company.
• Revenue Diversion: Piracy transfers money from producers and distributors of items such as audio recordings to people indulged in piracy, making those companies who make an investment in production and supplying less profitable.
• Tax Revenues: tax revenue is not generated from pirated items except where pirated items are sold through retail means and taxed. For example, when music is downloaded with no tax charged on it when according to the tax laws it is supposed to, the money is lost there. Lost tax revenue leads to a fall in funds available to the government to spend on people.
• Impact on creativity: Piracy may lead to the migration of talented creators to foreign countries thus depriving the wealth of countries of original creativity. For example, unrestrained piracy in most African countries has led to migration of many artists to Europe, where with the help of the existing copyright system, their works are better remunerated. This affects the native business entities to a drastic extent.
• Impact on foreign relations and development: Piracy destroys the base of local cultural industries and has a disadvantageous impact on their relations with foreign partners. It weakens lawful businesses, which cannot compete with the low prices set by pirate businesses. Thus, piracy impairs economic development too.
• Impact on employment: Pirated goods lead to an adverse effect on production by the legitimate industry thus leading to the generation of fewer jobs.
• Impact on foreign investment: Investment is dependent on both an adequate copyright system and effective enforcement of those rights.  If either these elements are missing, a country’s capability to attract investment accompanied by the supplementary benefits of increased employment opportunities, wealth creation as well as tax revenues will be lost.

Lessening the effects of piracy

It is thus very important in today’s world to find techniques that reduce the effect of piracy on both the individuals as well as business entities. Some of these ways are enlisted below- 

• Creating a clear software policy statement for the company. 
• Making the employees sign an anti-piracy statement. 
• Involving regular software inventories. 
• Knowing what the company’s software licenses allow.
• Educating the public about the influence of piracy on their lives. 
• Businesses can apply methods to prevent software piracy like changing the distribution of software so that it becomes harder to download etc. 

 ‘The inevitable impact legal processes put on business entities’

At some point or the other, all businesses have to face a legal dispute. Business litigation takes many structures that include contract disputes, misrepresentation, and matters of employment.  All have the capacity to bring about undesirable consequences for both small and large businesses. 

Preferably, business disputes can be sorted out without adopting litigation through direct negotiations, arbitration or mediation that are commonly way faster, less expensive, and more private than the litigation process. However, sometimes litigation is inevitable.  When parties are relentless to consider other options or have found substitutes for litigation as unsuccessful then litigation must be considered.

In any business issue, a company must always consider the effect a dispute will have on its bottom line. If a company is confronting a dispute, it must count the costs involved and decide whether it is a battle worth fighting. Every aspect of dispute resolution has a cost associated with it. Choosing the right way can either make or break the business.

If a company is considering raising an issue or is defending itself from a probable dispute, the assistance of a business attorney plays the most important role. A lawyer who has an in-depth comprehension of corporate law and civil litigation can help in deciding whether to pursue one of the following as a method to solve the issue:

• Mediation
• Arbitration
• Litigation
• Sorting the issue by backing off from the dispute

No matter in which way a corporate dispute is resolved it affects the company where it can hurt the most i.e. its finance. A successful resolution sometimes does not necessarily mean winning, what most people understand the meaning of it, but can mean perpetuating the black in your company ledger.

Most common legal issues 

• Immigration Audits
• Disappointed Employees
• Discrimination/Harassment Cases
• Immigration Audits
• Copyright and Patent problems

Drawbacks of litigation

Lawsuits can be expensive and have the ability to drive a company into bankruptcy. There is not only the mental anguish associated with the dispute but many costs are involved too. Regrettably, litigation has major drawbacks for many business owners which includes:

• Relationships 
• The bottom line
• Litigation costs – e.g. court fees, travel, depositions, copies, mail
• Time spent out of the business
• Attorney fees
• Award to the succeeding party
• Penalties and fines suffered as an outcome of a lost lawsuit

‘General partnership that advances protection to an individual against personal liability for certain partnership obligations’

Introduction 

A business partnership is a business established for the purpose of gaining profit and is run by two or more people. There can be any number of partners associated with the business as long as the minimum number remains two. A business partner becomes a co-owner of the business. 

Most business partnerships are usually general partnerships denoting that all partners have the responsibility for the business and limitless obligations for the financial obligations of the business. This implies that general partners share both the benefits as well as the damages caused due to the business. However, a limited liability partnership is considered to be a newer type of business partnership where all of the owners have personal liability (which is essentially limited) for the financial obligations concerned with the business. There are no general partners in an LLP. But an LLP is kind of similar to a general partnership. Every limited liability partner contributes to the everyday business operations, although each partner possesses limited personal liability for the acts of other partners. Each person’s personal liability for another partner’s acts is limited only to the partnership’s assets i.e. a partner cannot lose more than his investment for something that is done by the other partner.

It delivers the benefits of limited liability of a company, but at the same time allows its members the leisure of organising their internal management that is based on a mutually consented agreement that is similar to that in a partnership firm.

Owing to flexibility in its structure and functioning, LLP is considered to be very useful for small and medium enterprises and particularly for the enterprises in the services sector. 

Two or more individuals, concerned with carrying on a lawful business with the intention of profit, may form an LLP by means of subscribing their names to an incorporation document and filing it with the Registrar.

The LLP will be considered as a separate legal body (responsible to the full extent of its assets) with the accountability of the partners being limited only to their consented contribution in the LLP which may be of either tangible or intangible nature or both tangible and intangible in nature.

Characteristics of LLP (according to limited liability partnership act, 2008)

• The LLP will be a corporate entity and have a distinct legal body. It implies that limited liability partnership and the partners are separate from each other. 
• The mutual rights and responsibilities of partners of a LLP will be regulated by an agreement between partners or between the LLP and the partners based on the provisions of the LLP Act of 2008. The act gives flexibility to design the agreement as they please.
• Every LLP will have compulsorily minimum of two partners but the maximum number of partners is not limited
• The LLP will have a responsibility to maintain annual accounts that is supposed to reflect the true and fair view of its functioning. 
• A firm or a private company or an unregistered public company can get converted to a LLP according to the provisions of the Act. 
• The end to the LLP may be achieved either voluntary or by the committee to be created according to the Companies Act, 1956. Until the committee is formed, the power lies with the High Court in this regard.
• The Indian Partnership Act, 1932 will not be of relevance to Limited Liability Partnerships

Advantages of forming an LLP

• The liability of each partner is only up to the extent of his share as formulated in the agreement at the time of creating a LLP
• It has a low cost of establishment and is easy to manage
• The partners are not responsible for the acts of each other and can only be held responsible for their own acts
• Lesser restrictions are enforced on LLP by the government however the restrictions enforced on a company are much greater.
• A LLP can sue in its name and can be sued by others, the partners are not at all liable to be sued for the dues as against the LLP

Disadvantages of forming a LLP

• It cannot come out of its IPO (initial public offering) and acquire money from the public, which a company form of an organization can easily do.

Functions of SEBI in managing secondary market activities

Secondary Market is considered to be a market where securities (collateral) are exchanged after originally being offered to the public in the primary market and registered on the Stock Exchange. Major trading is usually done in the secondary market. Secondary market includes equity markets and the debt markets.

The secondary market presents a well-organized platform for the general investor for trading of his securities. Secondary equity markets act as an examining and control channel for the organization of the company by promoting value-enhancing control activities, authorizing execution of incentive-based management contracts, and accumulating information (through price discovery) that aids management decisions.

SEBI and its role

The SEBI (The Securities and Exchange Board of India) is the administrative body formed under Section 3 of SEBI Act 1992 to secure the interests of the people investing in securities and to encourage the growth of, and to manage the securities market and for the matters which are connected with it.

Various departments of SEBI regulating trading in the secondary market

      The following units of SEBI take care of the activities happening in the secondary market:

Sr.No.	Name of the Department	Major functions
1.	Market Intermediaries Registration and Supervision department (MIRSD)	Registration, management, acquiescence monitoring and examines all market intermediaries as concerns all sections of the markets namely equity, equity derivatives, debt as well as debt-related derivatives.
2.	Market Regulation Department (MRD)	Developing new policies and instructing the functioning and working (except matters relating to derivatives) of securities exchanges, their divisions, and market organizations such as Clearing and settling of organizations and repositories (referred to as ‘Market SROs’.)
3.	Derivatives and New Products Departments (DNPD)	Administering trading at derivatives sections of stock exchanges, introducing new products to be traded, and making certain changes in policy

 

                            ‘A contract defining shareholders’ rights and obligations’

When an individual is planning to establish a company with family members or friends it is easy to presume that nothing can go wrong in the coming years. You might conclude that as you trust each other and you are not in need of something called as shareholders’ agreement, rather it would sound that you are not trusting them if you put forth an idea of shareholders’ agreement.

Probably nothing will go wrong in the future. But even the family members and best friends fall out and you could then end up with literally nothing. Or you might have to face the breakdown of a friendship accompanied by a costly legal dispute related to the business.

A shareholders’ agreement is usually a consensus between the shareholders or investors of a company. It can be between all or only between some of the shareholders. Its motive is to secure the shareholders’ investment in the company as well as to maintain a just relationship between the shareholders and to administer the functioning of the company. The main purposes of the agreement are:

• To set out the shareholders’ rights and duties
• To manage the sale of shares in the company
• To describe the functioning process of the company
• To provide protection for minority shareholders and safeguarding their interests
• To define the process of making important decisions

The shareholders’ agreement will consist of particular, significant and practical rules relating to the company and the relationship between the shareholders.  

Some Salient Features of a Good Shareholder’s Agreement are:

• Nomination of Directors 
• Roles and rights of each shareholder.
• Financing and quorum demands as well as veto rights.
• Representation & guaranties from the Company.
• Restraints on transfer of shares 
• Forced transfer of shares and cutting down further issue of shares.
• Determining Shareholding Threshold i.e. must have a minimum shareholding given to a party for the party to enjoy the rights according to the Shareholding Agreement.
• Establishing and assigning special rights to specific shareholders
• Issuing and transferring shares 
• Providing some protection to the minority shareholders (having less than 50% of shares in the company)
• Functioning of the company that includes appointing, removing and paying directors, determining the company’s business, making capital outlays, providing managerial information to the shareholders, providing banking arrangements and financing the company.
• Paying the dividends.
• Competition limits.
• Procedures for resolution of disputes

Shareholders’ agreement for a minority shareholder:

Lack of shareholders’ agreement will lead to the minority shareholders having little control in the functioning of the company. The control will mostly rest with one or two shareholders.  Companies are normally run by decisions made by the majority and though the articles of association include provisions that safeguard the minority shareholders, these can be amended. 

Being a minority shareholder, it is very crucial to have a shareholders’ agreement that includes the compulsion for all shareholders to approve certain decisions makes sure that you have a say in the key decisions that influence the company.  This could be the decision on the matter of new shares, selection or removal of directors, taking new loans or changing the main trade business etc.

Shareholders’ agreement for a majority shareholder:

If an individual is a majority shareholder and he wants to sell his shares but a minority shareholder is relentless to agree then it becomes very important to include a provision forcing that shareholder to sell his shares.  This is generally known as a “drag along” provision.  This will allow you to realise your investment at a time and at a price that you feel is good.  Although the price and other payments for the sale need to be fair and just for all the shareholders, whether minority or majority.

Also if a majority shareholder wants to prevent minority shareholders to pass on confidential information of the company to competitors or establishing rival businesses, these terms can be included as a provision within a shareholders’ agreement.

Another issue is when one of the fellow shareholders transfers his shares to anyone.  This could be problematic if the sale is made to a competitor or someone else whom other shareholders do not want to get involved with the company. To sort these issues, shareholders’ agreements will usually include rules about share sales and transfer i.e. who shares can be transferred to, on what terms and conditions and at what price.