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anand das (service)     01 August 2011

Shareholders agreement

What is difference between shareholders agreement and joint ventureareement



Learning

 10 Replies

pervez (adviser)     06 August 2011

Big difference... not even correlated with each other... shareholders agreement deals with inter-se rights & obligation of the shareholders of a company [ unlisted], while joint venture agreement deals with agreement between the parties agreed to setup & carry on a new business having potential in the market...

1 Like

anand das (service)     08 August 2011

Thank you very much Mr Parvez. I got the point. However, i have some queries regarding shareholders agreement.

1. Shareholders of every company have to enter into a shareholders agreement or only shareholders of of a joint venture company can enter into shareholders agreement ?

2. If all provisions are given in MOA& AOA then why to enter into a shareholders agreement ? Is it necessary ?
 Is this a practice in other countries also ?

LLB.ACS Gourav Khatri (COMPANY SECRETARY)     10 August 2011

1.    Shareholders of every company have to enter into a shareholders’ agreement or only shareholders of a joint venture company can enter into shareholders agreement?

 First we need to understand what a Shareholders’ agreement is? It is a set of terms and conditions in which one prospective investor is promising to infuse funds in a company on terms of getting returns from the earnings of the prospective recipients of the said funds.

 Joint venture entities are formed with intention to exchange the benefits of an industry. The benefits can be exchanged in terms of:-

 a.     Technical benefits of investor company

b.    Geographical presence of investee company/ barriers on investors company

c.     Existing market presence of investee company

d.    Financial arrangements – debt has high leverages thus equity infusion is treated as most convenient.

 Therefore, shareholders agreement needs not to be executed by every company but only where arrangement of funds required to be secured by the investor.

 2. If all provisions are given in MOA& AOA then why to enter into a shareholders’ agreement? Is it necessary?
 Is this a practice in other countries also?

            It is a good question.

 MOA the charter of the company covers only five clauses viz. Name clause, Registered Office clause (also situation clause) Object clause, Liability clause and capital clause.

Thus a shareholders’ agreement has nothing to do with Memorandum of Association.

 Shareholders’ agreement is express opinion of the investors and investee companies. They mutually agree on terms of a business proposal. But in Shareholders agreement exact interests of parties are not defined. It is thus defined in the Shareholders agreement e.g. CEO and CFO nomination, detailed business terms etc. Whereas AOA is a sole document or soul document for internal management of the Company.

1 Like

anand das (service)     11 August 2011

Thanks Mr Parvez and Gaurava.

Its clear to me now.

thanks again


(Guest)

Thank you Gauravji,

You have very nicely explained the differences between the two.However, I have one more query.If there is conflict between the Shareholders Agreement and the AoA, which one will prevail.

C.A. A.K.Maitra

LLB.ACS Gourav Khatri (COMPANY SECRETARY)     18 May 2012

 

Courts have either refused to recognize clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association of the company. There is a series of rulings in the respect in case of any conflict between the Articles and the SHA, the former will always prevail. Some of these are:

 

􀂾 V.B. Rangaraj v. V.B. Gopalakrishnan (AIR 1992 SC 453)

􀂾 Shanti Prasad Jain v. Kalinga Tubes Ltd., (35 Com. Cas. 351 SC)

􀂾 Mafatlal Industries Ltd., v. Gujarat Gas Co. Ltd (97 Comp Cas 301 Guj),

􀂾 Pushpa Katoch v. Manu Maharani Hotels Limited ([2006] 131 Comp Cas 42 (Delhi)]

 

In Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd [(2010) 154 Company Cases 593 (Bom)], it was held that such clauses are to hamper the free transferability of shares and in violation of section 111A of the Companies Act, 1956 and hence, are not enforceable. However, the Supreme Court in 2003 in its decision in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. (2003 117 CompCas 19 SC ) not disagreeing with the decision in V.B Rangaraj (Supra) but distinguishing itself from the facts in that judgment, held that a restriction in relation to identified members on identified shares of a private company did not amount to restriction of transferability of shares per se.

S Jadhav 98336 98330 (Jadhav & Associates)     23 May 2012

Was the query only for academic purposes or was the querist involved in a case relating to the query?

S Jadhav


(Guest)

Dear S.Jadhav Ji,

I needed the above information in connection with prepartion of a Shareholders Agreement(S.A.). for my organization.

While preparing it , I saw that some specimen agreement contain a clause that in case of a conflict between the two,the provisions contained in the Shareholders Agreement shall prevail,which seemed to me not correct.

Moreover , I wanted to suggest to my management in connection with a proposal for a specific project ,whether they should go in for the S.A. or J.V. and for the said purpose, I desired to know the exact differences between the two.

So I raised these queries and got  very satisfactory replies from Shri Gaurav Khatri ji, who was kind enough to help me in the matter.

Regards,

A.K.Maitra,M.Com;LL.B;A.C.A;A.C.S.

LLB.ACS Gourav Khatri (COMPANY SECRETARY)     23 May 2012

Thanks Mr. Maitra. Regards, Gourav

S Jadhav 98336 98330 (Jadhav & Associates)     25 May 2012

Thank you Mr. Maitra. Please do not take offence as the query can be replied better if a little background is provided.

Gaurav has really explained well.

S Jadhav


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