Shareholders Agreements: A shareholders agreement is a written agreement between the shareholders of a corporation to define their rights and obligations

with respect to the management and operation of the corporation and the purchase and sale of shares in the capital stock of the corporation. Generally such an agreement is entered into between shareholders of a closely-held corporation. The principal provisions of a shareholders agreement relate to control, management and operation of a corporation, funding of a corporations capital needs, transfer of shares to third parties and mandatory and optional transfer of shares. In strict legal theory, the relationships amongst the shareholders and those between the shareholders and the company are regulated by the constitutional documents of the company; however, where there are a relatively small number of shareholders it is quite common in practice for the shareholder to supplement the constitutional document. A company's constitutional documents are normally available for public inspection, whereas the terms of a shareholders' agreement, as a private law contract, are normally confidential between the parties. Greater flexibility; the shareholders may anticipate that the company's business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution. Corporate law in the relevant company may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders' agreement.

Articles of association Or Memorandum of Association: The memorandum of association gives the company's name, names of its members (shareholders) and number of shares held by them, and location of its registered office. It also states the company's: (1) Objectives (2) Amount of authorized share capital,

(3) Whether liability of its members is limited by shares or by guaranty, and (4) What type of contracts the company is allowed to enter into. Almost all of its provisions (except those mandated by corporate legislation) can be altered by the company's members by following the prescribed procedures. The memorandum is a public document and may be inspected by anyone, usually at the public office where it is lodged. The Articles are a requirement for the establishment of a company under the law of India. They constitute the constitution of a company. The memorandum of Association is the primary document, and will generally regulate the company's activities with the outside world. It states which objects the company is meant to follow and specifies the authorized share capital of the company. The articles of association is the secondary document, and will generally regulate the company's internal affairs and management, such as procedures for board meetings, dividend entitlements etc. Why do one need a Share holders Agreement? There are many situations in which a shareholders agreement can get you out of trouble or provide for a solution other than that prescribed by law. Here are few of them: When an unfortunate event occurs, such as conflict with one of the share holders, disability, the bankruptcy or the death of a shareholder etc. When the shareholders wants to maintain equal shareholding among them throughout the companys existence. When the shareholders wants to participate in certain decisions such as introduction of new partners to the company. When it has been decided that certain specific situations require an increase in the no. of votes required with respect to shareholder voting.

Why have a shareholders agreement? Shareholders agreements are an extremely diverse means of controlling the relationship between shareholders. They can be used for almost any purpose from controlling voting at shareholders meetings to giving individual shareholders the ability to purchase more and more shares. Much of what is included in a shareholders agreement can be included in the companys articles of association.

However, shareholders agreements have the advantage of being private, unlike the Articles. The Articles have to be filed at Companies House and as a result are available for any member of the public to obtain. A shareholders agreement cannot differentiate between shareholders, so that different individuals can be treated differently. A shareholders agreement can also include rights granted to shareholders in a personal capacity that would be unenforceable if they were contained in the Articles. However, one advantage of the Articles is that new shareholders will automatically become bound by them. If you have a shareholders agreement it will be necessary for new shareholders to enter into a deed of adherence to become bound by the shareholders agreement. Risks which can be associated with putting a shareholders' agreement: In some countries, using a shareholders' agreement can constitute a partnership, which can have unintended tax consequences, or result in liability attaching to shareholders in the event of a bankruptcy. Where the shareholders' agreement is inconsistent with the constitutional documents, the efficacy of the parties' intended arrangement can be undermined. In certain circumstances, a shareholders' agreement can be put forward as evidence of a conspiracy and/or monopolistic practices.

Whether Shareholders Agreement are enforceable in India regardless of whether they have been incorporated in the Articles of Association of the Company: In India share holders agreement are not enforceable unless incorporated in the articles. This state of affairs in India has been reiterated in a recent judgment of Dr Chandchud of the Bombay High Court in IL & FS Trust Co Ltd v Birla Perucchini Ltd [2004] 121 Comp Cas 335 (Bom). The learned judge held that since the provision contained in the subscription agreement to the effect that the second respondent would not resign from the board "till the validity of this agreement" was not translated into an amendment of the articles of association of the company. The fact that the company is a party to

the subscription agreement makes no difference to this position because the position in law is well settled. Shareholder agreements (also known as Stockholder agreements) are contracts between some or all of the shareholders of a company in which they agree to the structure, shareholding, directors, management and control of the Company and their rights and obligations inter se. A shareholders agreement is a supplement to the company's constitution and will generally regulate shareholders rights and regulate the management and operation policy of the company. In England the House of Lords has held in Russell v Northern Bank Development Corporation Ltd [1992] 3 All ER 161 that, a shareholders' agreement can be enforced in a court by the shareholder who is a party to the agreement against the other party, though not against the company where the enforcement of a term of the agreement is not consistent with the law, ie the Companies Act.
The House of Lords held that although a provision in a company's articles which restricted

its statutory power to alter those articles was invalid, an agreement outside the articles between shareholders as to how they would exercise their voting rights on a resolution to alter the articles was not necessarily invalid. In Rangaraj case the Supreme Court declined to enforce the agreement even though no order was sought by the plaintiff (shareholder) against the company and the company was not a party to the agreement and, in fact, held the agreement was "not binding either on the shareholders or on the company" because it was contrary to the provisions of the articles (emphasis supplied). In India, we need a reform on this front in view of growing involvement of overseas companies in joint ventures formed by a partnership that is governed by an agreement usually called a shareholders' agreement Whether Share holders Agreements needs to be incorporated in companys MoA: Share holders agreement should be incorporated in companys Moa. It protects the rights , duties & liabilities of share holder. If it will be incorporated in companys MoA then there will b less disputes among shareholders.

It is a prudent practice to have a Shareholder's Agreement drafted when shareholder's come together to form a company, mainly to overcome the problems which a company constitution do not cover or is silent. A company constitution do not cover issues and mechanisms to deal with rights of minority shareholders, shareholder exit strategies in the event of death, disability, retirement etc., confidentiality agreements, operation and management of business, shareholder's warranties, dividend distribution policy etc. A Shareholder Agreement should cover all aspects of the relationship and the mechanics by which the company is to be operated. The agreement should also protect the respective interests of the Shareholders to the agreement and outline dispute resolution provisions in the event of any disagreement between the Shareholders