Shareholder Agreement (SHA)

A company having equity investors must have an SHA which acknowledges their contribution in a safe and secure manner. A Shareholder Agreement is a contract between the shareholders of a company which helps to establish a fair professional bridge between the stakeholders and the operation of the company.

Key Terms & Conditions of a Shareholder Agreement

• Parties to be defined;

• Business activity and its scope to be outlined clearly;

• Authorized and Paid Up capital to be defined;

• Issuance of further capital must be through the written consent of the shareholders;

• Rights and Obligations of the shareholders;

• Rights of the shareholders to appoint and remove the Board of Directors. They can also appoint themselves to be the Directors;

• Board Meetings & Shareholders’ Meetings;

• Rights to appoint a Quorum, voice a VETO, etc;

• Resolutions regarding nature and business activity undertaken by the Company, taking up loans, declaration of dividends, etc. should be taken through the written consent of the Board of Directors and Shareholders only;

• Appointment of auditors by the shareholders and their removal;

• Shareholding Threshold for enjoyment of rights under SHA;

• The power to sell the shares should not be over-amplified but also shouldn’t be undermined – the shareholder desiring to sell his shares should first express his desire to the other shareholders and if they are not interested, he should be allowed to sell it to any other interested party;

• Transfer of shares and lock-in period including right of first refusal, preemptive rights, buy-back rights, right of the first offer, etc;

• Governing Laws and jurisdiction of competent court;

• Non-compete and non-solicitation clause;

• Dispute Resolution – preferably arbitration clause.

Statutory Law References

Indian Contract Act, 1872

The Companies Act, 2013

Securities Contracts (Regulation) Act, 1956

Depositories Act, 1996

Landmark Judgments

V. B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453

Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Case 29 (Bombay High Court)

Russell v Northern Bank Development Corporation Ltd, [1992] 1 WLR 588

Important Do(s) & Don't(s)

• Lawyer consultation or online legal advice should be the preferred way of drafting an SHA.

• Neatly draft the Articles of Association while your company’s incorporation and not just copy-paste them.

• SHA does not bind third parties unless their affairs form part of public domain.

Offence Of Abetment To Suicide (306IPC) Can’t Be Quashed On Settlement Between Parties - Bombay HC

On 2^nd March 2017, the Bombay High Court refused to quash the FIR against a person who had filed a writ petition for quashing the same on the grounds of the settlement with the victim’s father.

Case Name

Mohd. Asgar Choudhari and Ors. v. State of Maharashtra and Anr., WP No. 31 0f 2017 (Bombay HC)

Where it all began

The FIR was registered against Mohd. Asgar Choudhari, i.e., the Petitioner, under Sections 498A (cruelty), 306 (abetment to suicide) & 406 (punishment for criminal breach of trust) of Indian Penal Code, 1860. The petitioner was in a relationship with the victim. The first informant (father of the victim) registered the FIR on the grounds of abetment to suicide of his daughter. However, his affidavit in an order dated 2^nd January 2017 spoke otherwise, stating that “he was in a shocked state of mind due to the sudden demise of his daughter and his daughter committed suicide under depression.” This contrary statement has raised doubts over the veracity of the facts of the case. The petitioner then filed a writ petition before the Bombay High Court to quash the said FIR registered against him as the settlement has been reached between the petitioner and the first informant.

The Masqueraded Settlement

The petitioner scored a settlement with the first informant behind the curtains for an amount of Rs 8 lakhs. His cousin sent a letter dated 17-02-17 to the Senior Inspector of Police, Deonar Police Station, Mumbai mentioning the same.

The Verdict

The bench of Justice A. S. Oka and Justice Anuja Prabhudessai refused to quash the FIR on the ground that the victim of the alleged offence is no more and therefore, rejected the writ petition. However, it observed that the petitioner would not be precluded from applying for discharge.

Arbitration For Start-up

Arbitration (Meaning and Law)
Arbitration is an alternate dispute resolution mechanism in which the dispute is submitted to a neutral third-party known as the arbitrator(s). He is appointed by both the parties, who subsequently holds the arbitral proceedings, analyzed evidence and adjudges on the matter by passing an award.

Need for Arbitration for a Start-up
• It is a faster and more simpler method of resolving disputes;
• More economical than hardcore litigation;
• Start-ups are not financially phenomenal and therefore, arbitration is financially feasible;
• Private proceedings rather than courtroom drama for a start-up;
• A judge may not be the expert in the concerned arena but an expert arbitrator in that arena may be appointed.

The Arbitration Clause
The following arbitration clause is a must for a contract. It is not a legal requirement but for a speedy out-of-court settlement:
“Any dispute or difference arising between the parties to this contract out of or in connection to this contract including the question regarding its meaning, scope, legality, existence, operation, termination, validity of its breach or of compensation payable thereof shall be settled through the means of arbitration in accordance with the Rules of International Commercial Arbitration of the Indian Council of Arbitration and the award made in pursuance to such process shall be binding on the parties hereto.”

Key Terms & Conditions of a detailed Arbitration Agreement
• Validity of the arbitration agreement;
• Enforcement of arbitration agreement;
• Appointment of arbitrators;
• Place of arbitration;
• Arbitrability of dispute;
• Choice of law (substantial and procedural);
• Type of arbitration (institutional, ad-hoc or any other);
• Multi-party agreements.

Important things to Remember
• Arbitration may be binding or non-binding upon the parties, i.e., a party may even reject the award of the arbitration;
• Arbitration award can only be set aside and not appealed;
• In some cases, the costs of arbitration may even exceed the costs of litigation;
• Indian courts may refuse to allow the choice of law between the parties on the grounds of public policy.

Statutory Law References
Indian Arbitration and Conciliation Act, 1996
Indian Contract Act, 1872

Landmark Judgments
ONCG v Saw Pipes, (2003) 5 SCC 705
Venture Global Engineering LLC v Satyam Computer Services Ltd, (2008) 4 SCC 190
Bharat Aluminium Co Ltd v Kaiser Aluminium Technical Service Inc, (2012) 9 SCC 649

Important Do(s) & Don’t(s)
• Legal consultation or online legal advice is essential for drafting arbitration agreement and arbitration proceedings;
• A start-up should always go for arbitration which is financially feasible;
• An arbitration agreement should be drafted in a detailed manner so as to outline the whole process;
• Even no. of arbitrators should not be appointed but only in odd numbers such as 1, 3, 5, 7, etc;
• Hold consolidate arbitration proceedings in case of multi-party agreements.