How to Draft a Shareholders’ Agreement

Introduction

A shareholders’ agreement is a legally binding contract between the shareholders of a company that outlines their rights, responsibilities, and obligations. This document serves as a roadmap for managing the company’s affairs and resolving potential conflicts. In Nepal, the Companies Act 2063 (2006) provides the legal framework for shareholders’ agreements. Drafting a comprehensive shareholders’ agreement requires careful consideration of various factors, including the company’s structure, objectives, and the interests of all parties involved.

What is a Shareholders’ Agreement?

A shareholders’ agreement is a contractual arrangement between the shareholders of a company that defines their rights, duties, and relationships. It supplements the company’s articles of association and provides additional protection for shareholders’ interests. The agreement typically covers aspects such as share transfer restrictions, decision-making processes, dividend policies, and dispute resolution mechanisms. In Nepal, shareholders’ agreements are recognized under the Companies Act 2063 (2006) and are enforceable as per contract law principles.

Importance of a Shareholders’ Agreement

A well-drafted shareholders’ agreement is essential for maintaining harmony among shareholders and ensuring smooth company operations. It provides clarity on crucial matters such as ownership rights, management responsibilities, and profit distribution. The agreement helps prevent misunderstandings and conflicts by establishing clear guidelines for decision-making and dispute resolution. Additionally, it protects minority shareholders’ interests and sets out procedures for handling various scenarios, such as the exit of a shareholder or the sale of the company.

Key Elements of the Agreement

A comprehensive shareholders’ agreement should include the following key elements:

1. Shareholder rights and obligations
2. Share transfer restrictions and procedures
3. Decision-making processes and voting rights
4. Dividend policy and profit distribution
5. Management structure and appointment of directors
6. Confidentiality and non-compete clauses
7. Dispute resolution mechanisms
8. Exit strategies and valuation methods
9. Intellectual property rights
10. Funding arrangements and capital contributions
11. Deadlock resolution procedures
12. Tag-along and drag-along rights
13. Pre-emptive rights for new share issues
14. Information rights and financial reporting requirements
15. Amendment and termination provisions

Legal Requirements for Drafting

In Nepal, the legal requirements for drafting a shareholders’ agreement are primarily governed by the Companies Act 2063 (2006) and the Contract Act 2056 (2000). The agreement must comply with these laws and should not contradict the company’s articles of association. It is essential to ensure that the agreement does not violate any provisions of the Companies Act or other relevant laws. The agreement should be in writing and signed by all parties involved. While registration with the Company Registrar’s Office is not mandatory, it is advisable to maintain a copy of the agreement with the company’s records.

Documents Needed for Drafting

To draft a comprehensive shareholders’ agreement, the following documents are typically required:

• Company registration certificate
• Memorandum of Association
• Articles of Association
• Share certificates
• List of shareholders and their shareholding details
• Company’s financial statements
• Business plan or company objectives
• Existing agreements or contracts related to the company
• Minutes of board meetings and shareholder meetings
• Organizational chart and management structure
• Intellectual property documentation
• Any relevant licenses or permits

Process for Creating the Agreement

The process for creating a shareholders’ agreement involves several steps:

1. Identify the parties involved and their respective interests
2. Conduct preliminary discussions to determine key issues and objectives
3. Prepare an initial draft of the agreement
4. Review and revise the draft with input from all parties
5. Seek legal advice to ensure compliance with Nepalese laws
6. Negotiate and finalize the terms of the agreement
7. Obtain approval from all shareholders
8. Execute the agreement by having all parties sign it
9. Distribute copies to all signatories and maintain a copy in company records
10. Implement the provisions of the agreement in company operations

Role of Shareholders and Advisors

Shareholders play a crucial role in drafting the agreement by providing input on their expectations, concerns, and objectives. They should actively participate in discussions and negotiations to ensure their interests are adequately represented. Legal advisors are essential in guiding the drafting process, ensuring compliance with Nepalese laws, and addressing potential legal issues. Financial advisors can provide valuable insights on financial provisions, valuation methods, and tax implications. Company directors and management should also be involved to ensure alignment with the company’s operational needs and strategic goals.

Timeline for Drafting and Signing

The timeline for drafting and signing a shareholders’ agreement can vary depending on the complexity of the company structure and the number of parties involved. On average, the process may take 4-8 weeks. This includes time for initial discussions, drafting, review, negotiations, and finalizing the agreement. Factors that can affect the timeline include the availability of required documents, the level of consensus among shareholders, and the need for legal or financial advice. It is advisable to allocate sufficient time for thorough review and discussion to ensure all parties are satisfied with the final agreement.

Cost of Drafting a Shareholders’ Agreement

The cost of drafting a shareholders’ agreement in Nepal can vary depending on several factors:

1. Complexity of the company structure
2. Number of shareholders involved
3. Scope and detail of the agreement
4. Experience and expertise of the legal professionals engaged
5. Need for specialized advice (e.g., tax or financial consultations)
6. Time required for negotiations and revisions

On average, the cost may range from NPR 50,000 to NPR 300,000 or more for complex agreements. It is advisable to obtain quotes from multiple legal firms and consider the long-term benefits of a well-drafted agreement when evaluating costs.

Checklist for a Comprehensive Agreement

A comprehensive shareholders’ agreement should address the following points:

• Shareholder details and shareholding structure
• Share transfer restrictions and procedures
• Voting rights and decision-making processes
• Board composition and appointment of directors
• Management responsibilities and authority
• Dividend policy and profit distribution
• Funding arrangements and capital contributions
• Intellectual property rights
• Confidentiality and non-compete clauses
• Dispute resolution mechanisms
• Exit strategies and share valuation methods
• Tag-along and drag-along rights
• Pre-emptive rights for new share issues
• Information rights and reporting requirements
• Amendment and termination provisions

Laws Governing Shareholders’ Agreements

In Nepal, shareholders’ agreements are primarily governed by the following laws:

1. Companies Act 2063 (2006): Provides the legal framework for company formation, management, and shareholder rights.
2. Contract Act 2056 (2000): Governs the formation and enforcement of contracts, including shareholders’ agreements.
3. Securities Act 2063 (2007): Relevant for public companies and matters related to securities.
4. Foreign Investment and Technology Transfer Act 2075 (2019): Applicable for agreements involving foreign shareholders.
5. Arbitration Act 2055 (1999): Relevant for dispute resolution clauses in the agreement.

It is essential to ensure that the shareholders’ agreement complies with these laws and does not contradict any statutory provisions.

Common Issues Addressed in Agreements

Shareholders’ agreements typically address several common issues:

1. Share transfer restrictions and right of first refusal
2. Decision-making processes for major company decisions
3. Appointment and removal of directors
4. Dividend policy and profit distribution
5. Funding requirements and capital contributions
6. Protection of minority shareholder rights
7. Confidentiality and non-compete obligations
8. Intellectual property ownership and usage
9. Dispute resolution mechanisms
10. Exit strategies and share valuation methods
11. Tag-along and drag-along rights
12. Deadlock resolution procedures
13. Information rights and financial reporting
14. Pre-emptive rights for new share issues
15. Change of control provisions

Revising and Updating the Agreement

Shareholders’ agreements should be periodically reviewed and updated to reflect changes in the company’s circumstances, shareholder composition, or legal requirements. The process for revising the agreement typically involves:

1. Identifying areas that require updating
2. Discussing proposed changes with all shareholders
3. Drafting amendments or a new agreement
4. Reviewing the revised agreement with legal advisors
5. Obtaining approval from all shareholders
6. Executing the updated agreement
7. Distributing copies to all parties and updating company records

It is advisable to include a provision in the original agreement that outlines the process for making amendments.

Dispute Resolution Clauses in the Agreement

Effective dispute resolution clauses are crucial in shareholders’ agreements. These clauses typically include:

1. Negotiation: Requiring parties to attempt good-faith negotiations before escalating the dispute.
2. Mediation: Involving a neutral third party to facilitate discussions and reach a resolution.
3. Arbitration: Submitting disputes to binding arbitration under the Arbitration Act 2055 (1999).
4. Jurisdiction: Specifying the court that will have jurisdiction over legal proceedings.
5. Governing law: Stating the law that will govern the interpretation and enforcement of the agreement.

It is advisable to include a step-by-step dispute resolution process, starting with negotiation and escalating to more formal methods if necessary.

FAQs

1. Who drafts the agreement?

Typically, a lawyer or legal firm specializing in corporate law drafts the shareholders’ agreement. However, input from shareholders, company management, and financial advisors is essential in creating a comprehensive agreement that addresses all parties’ needs.

2. How many parties can sign it?

There is no legal limit on the number of parties that can sign a shareholders’ agreement. All shareholders of the company can be parties to the agreement. In some cases, the company itself may also be a party to the agreement.

3. Are templates available?

Yes, templates for shareholders’ agreements are available online and through legal service providers. However, it is advisable to use these templates only as a starting point and customize the agreement to fit the specific needs of the company and its shareholders.

4. Does it need to be notarized?

In Nepal, shareholders’ agreements do not legally require notarization. However, notarization can provide an additional layer of authenticity and may be beneficial in case of future disputes. It is advisable to consult with a legal professional regarding the necessity of notarization.

5. How long does it take to draft?

The time required to draft a shareholders’ agreement can vary depending on the complexity of the company structure and the number of parties involved. On average, the process may take 4-8 weeks from initial discussions to final execution. This timeline allows for thorough review, negotiations, and legal consultations to ensure a comprehensive and satisfactory agreement for all parties.