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.

Employment Contract

An Employment Contract is a legal agreement which delineates the terms and conditions of employment between an employee and an employer such as wages, duration of works, non-compete procedures, etc. They are usually signed and executed at the time of the inception of employment. There are majorly three types of employment contracts: -

* Full-time employment contract (FTEC)

* Part-time employment contract (PTEC)

* Freelancer employment contract (FLEC)

Key Terms & Conditions of an Employment Contract

• Definitions and Interpretations;

• Acceptance of employee by the employer for the job and acceptance of job by the employee;

• Responsibilities and obligations involved in the job;

• Duration of probationary period and salary during that period;

• Salary including Basic, HRA, Medical Allowance, Education Allowance, etc;

• Status of job: Full time, part time or freelancers;

• Place of work;

• Date of starting and ending of job;

• Working hours in a day and working days in a week (for FTEC and PTEC) or assignment completion basis (for FREC);

• Overtime (for FTEC and PTEC);

• Payroll schedule: on a daily, weekly, biweekly, semi-monthly, monthly, per piece of work, etc;

• Refunds for calls travels carried out in the course of employment;

• Holidays and Paid leaves in a year;

• Unpaid leaves and exceptions to it;

• Perquisites;

• Deductions;

• Required travels: once in a week, twice in a month, 10 times in a year, etc;

• Policies and standards;

• Confidentiality and Non-Disclosure;

• Non-solicitation which may hinder the company’s interests;

• Provident Fund

• Change in duties and remuneration would not make the present contract invalid;

• Prior notice of resignation;

• Termination of employment by the employer;

• Indemnification;

• Governing Laws;

• Dispute Resolution;

• Schedule A – Job description;

• Schedule B – Confidentiality and Non-Disclosure agreement.

Statutory Law References

Sec. 2(h) & 27 of the Indian Contract Act, 1872

Industrial Disputes Act, 1947

Payment of Gratuity Act, 1972

Industrial Employment (Standing Orders) Act, 1946

Factories Act, 1948

Payment of Wages Act 1936

Minimum Wages Act 1948

The Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013

Employees' Provident Fund and Miscellaneous Provisions Act 1952

Landmark Judgments

Diljeet Titus v. Mr. Alfred A. Adebare and Ors. 2006 (32) PTC 609 (Del)

Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Company Ltd. 1967 AIR 1098

Desiccant Rotors International Pvt. Ltd v. Bappaditya Sarkar & Anr, Delhi HC, CS (OS) No. 337/2008

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

• Contract should be signed and executed at the time of beginning of employment;

• Lawyer consultation or online legal advice should be the priority before executing such contract;

• Bond for a minimum time period of employment should be avoided as it constrains the employee to be with the company even if the work is contrary to his expectations;

What is a Founder Agreement (FA)?

When a startup company comes into existence, it requires a set of rules between the founders/promoters of that company. “Founder Agreement” is a contract which is drawn between the founders/promoters of a company on key issues in regards to their company.

Why do we need it?
• To outline mutual understanding, responsibilities, rights and obligations of each party to the FA and align their goals.
• To keep a record which will prevent ambiguities in future.
• To provide for allocation and distribution of resources.

When to enter such agreement?
 At the time of tabling the idea;
 At the time of incorporation;
 At the time of capitalization.

Standard Terms & Conditions of a FA
• Equity Investment and Shareholding Structure: Who should hold how much shares? Equity should be divided on the basis of contribution of each of the founders respectively.
• Board Management and Governance: How many founders to be on the Board and why? How the company is to be governed?
• Salary: Compute the salaries of the Founders and their increments.
• Roles & Responsibilities: Divide roles and responsibilities at the top management.
• Shareholders’ Meeting: Frequency of meetings, authorized people in the meetings.
• Fresh Issue and Transfer of Shares: Issues such as Lock-in periods, founder selling his stakes, Right of First Refusal, transfer upon death, etc.
• Approval of Debts: What will be the procedure to approve action which might incur debts to the company?
• Appointment and Removal of a CEO: It should be agreed as to how founder(s) will appoint and remove the CEO.
• Vesting: Right of the company to buy back its shares upon some contingencies is mentioned.
• Confidentiality, Non-Compete and Non-solicit: A founder not to engage in any activity (espionage, breach of confidentiality) with any other entity which would jeopardize or be adverse to the company’s interests or would directly compete with the company.
• Representation and Warranties: Founders are restricted from entering into any other contracts which would limit their obligation towards the company and also, prevent any third party rights over the Intellectual Property of the founder(s)/company.
• Amicable Exit from business: A strategy as to how to exit from the business should be devised.
• IP Rights: Intellectual Property Rights should be accorded to the company and in case of partnership, to all the partners.
• Indemnity: Founders to indemnify the investors for the loss caused by misrepresentation or warranties given to them.
• Governing Law and Dispute Resolution: The FA should mention the laws to be followed and the process of dispute resolution.

Statutory Law References
Sec. 2(h) of the Indian Contract Act, 1872.

Important Do(s) and Dont(s)
• It should be a written agreement to remove ambiguities,
• It should be entered into at the time of incorporation of the company,
• Ensure the legality of the contract and its proper execution,
• Do not provide for severability of clauses as it is not recognized under Indian laws,
• Articles of Association should contain the provisions of FA.
• Above all, lawyer consultation is necessary to draft the agreement so as to review the legalities.