Joint Venture - Shareholders' Agreement

Shareholders' Agreement

This is a legal area and is fraught with difficulty as the laws of countries differ, particularly on the enforceability of 'heads of' or shareholder agreements. For some legal reasons it may be called a Memorandum of Understanding. It is done in parallel with other activities in forming a JV. Though dealt with briefly for a shareholders' agreement,) some issues must be dealt with here as a preamble to the discussion that follows. There are also many issues which are not in the Articles when a company starts up or never ever present. Also, a JV may elect to stay as a JV alone in a 'quasi partnership' to avoid any nonessential disclosure to the government or the public.

Some of the issues in a shareholders' agreement are:

• Valuation of intellectual rights, say, the valuations of the IPR of one partner and,say, the real estate of the other
• the control of the Company either by the number of Directors or its "funding"
• The number of directors and the rights of the founders to their appoint Directors which shows as to whether a shareholder dominates or shares equality.
• management decisions - whether the board manages or a founder
• transferability of shares - assignment rights of the founders to other members of the company
• dividend policy - percentage of profits to be declared when there is profit
• winding up - the conditions, notice to members
• confidentiality of know-how and founders' agreement and penalties for disclosure
• first right of refusal - purchase rights and counter-bid by a founder.

There are many features which have to be incorporated into the Shareholders Agreement which is quite private to the parties as they start off. Normally, it requires no submission to any authority.

The other basic document which must be articulated is the Articles which is a published document and known to members.

This repeats the Shareholders Agreement as to the number of Directors each founder can appoint to the (see Board of Directors). Whether the Board controls or the Founders. The taking of decisions by simple majority (50%+1) of those present or a 51% or 75% majority with all Directors present (their alternates/proxy); the deployment of funds of the firm; extent of debt; the proportion of profit that can be declared as dividends; etc. Also significant is what will happen if the firm is dissolved; one of the partner dies. Also, the 'first right' of refusal if the firm is sold, sometimes its puts and calls.

Often the most successful JVs are those with 50:50 partnership with each party having the same number of Directors but rotating control over the firm, or rights to appoint the Chairperson and Vice-chair of the Company. Sometimes a party may give a separate trusted person to vote in its place proxy vote of the Founder at Board Meetings.

Recently, in a major case the Indian Supreme Court has held that Memorandums of Understanding (whose details are not in the Articles of Association) are "unconstitutional" giving more transparency to undertakings.