A shareholders' agreement, also called a stockholders' agreement, is an arrangement among shareholders that describes how a company should be operated and outlines shareholders' rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders. Can a listed company have a shareholders’ agreement?
Ø Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
As per Regulation 4(2)(a)(i) of Chapter II (Principles Governing Disclosures and Obligations of Listed Entity) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity which has listed its specified securities[1] shall comply with the corporate governance provisions as specified in chapter IV which shall be implemented in a manner so as to achieve the objectives of the principles as mentioned below:
The listed entity shall recognise the rights of its stakeholders and encourage co-operation between listed entity and the stakeholders, in the following manner:
The listed entity shall respect the rights of stakeholders that are established by law or through mutual agreements.
Ø Companies Act, 2013
As per Section 58(2) of the Companies Act, 2013, the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
Ø Judgement
There is a judgment by Honorable Supreme Court of India in the case of Vodafone International Holdings B.V. vs. Union of India, whereby, the court has taken the view that provisions of the shareholders' agreement (SHA) imposing restrictions, even when consistent with company legislation, are to be authorized only when they are incorporated in the articles of association (AoA), is a view we do not subscribe. Therefore, the shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the AoA. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company.
There have been cases wherein certain rights under SHAs have survived even after listing, most notable cases being Jet Airways (India) Limited and Interglobe Aviation Limited. In the case of Interglobe Aviation Limited, even after its public issue, its promoter group retains certain rights based on the shareholders agreement as inculcated in the AoA.
Ø SEBI Consultation Paper on Strengthening Corporate Governance at Listed Entities by Empowering Shareholders – Amendments to the SEBI (LODR) Regulations, 2015 dated 21 February 2023
Shareholder agreements are one of the common types of agreements entered into and disclosed by listed entities. A shareholder agreement is an arrangement that regulates the relationship between the shareholders, the management of the company, ownership of the shares, rights, obligations, and protection of the shareholders. SHA may be entered into between shareholders (without the involvement of the company) or between the shareholder(s) and the company. The rights, obligations, protection etc. enshrined in the SHA may be incorporated in the AoA (subject to special resolution) of a company or may not form part of the AoA of a company.
There have been instances wherein promoters have entered into binding agreements with third parties having an impact on the management or control of a listed entity or such agreements have placed certain restrictions on the listed entity, however, these facts were not disclosed to the listed entity and its shareholders. Non-disclosure of material information creates information asymmetry and results in significant market reaction when it is known to the public at large at a later stage.
As per clause 5A of para A of Part A of Schedule III of the LODR states:
(i) Agreements which, either directly or indirectly or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon listed entity shall be disclosed to the stock exchanges, whether or not the listed entity is a party to such agreements. Provided that revision(s) or amendment(s) and termination(s) of such agreements shall also be disclosed. Provided further that only such agreements which are binding and entered into by the shareholders, promoters, promoter group, related parties, directors, key managerial personnel, any other officer of a listed entity or of its holding, subsidiary, associate company, solely or jointly with the listed entity or a third party shall be disclosed.
If the listed entity is not party to any agreement specified above, it shall be obligatory on the part of the shareholders, promoters, promoter group, related parties, directors, key managerial personnel or any other officer of a listed entity or of its holding, subsidiary, associate company who are parties to such agreements to inform the listed entity about such agreements within 2 working days from the date entering into such an agreement. The listed entity, in turn, shall disclose the said details to the stock exchanges within the timelines for disclosure of events specified in para A of Part A of Schedule III of the LODR.
Ø SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
An issuer is required to provide a statement that the shares allotted in the public issue are equal in all respects, including dividends, with the existing shares issued by the company prior to the public issue, excluding SR (Superior Rights) equity shares. The underlying principle is that the shares issued in the Initial Public Offer (IPO) shall rank equally with the existing shares and any right which is not available to other shareholders is not be permitted to survive after listing.
In view of the above, for a company coming up with an IPO, all the existing SHAs are cancelled or modified to the extent that special rights available to certain shareholders, except nominee / nomination rights and information rights, are terminated before listing. As per the principles specified in regulation 4 of the LODR, every listed entity shall ensure equitable treatment of all shareholders, including minority and foreign shareholders. However, if any shareholder enjoys special rights and privileges, the same should have been agreed upon by all the other shareholders of a company. Further, such rights and privileges must be in proportion to one’s holding in the company. As per Regulation of 31B, any special right granted to the shareholders of a listed entity shall be subject to the approval by the shareholders in a general meeting by way of a special resolution once in every five years starting from the date of grant of such special right.
Ø Conclusion
Thus, a listed company can have a shareholders’ agreement subject to:
i. Agreements which, either directly or indirectly or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon listed entity shall be disclosed to the stock exchanges, whether or not the listed entity is a party to such agreements.
ii. A company coming up with an IPO, all the existing SHAs are cancelled or modified to the extent that special rights available to certain shareholders, except nominee / nomination rights and information rights, are terminated before listing. Further, any special right granted to the shareholders of a listed entity shall be subject to the approval by the shareholders in a general meeting by way of a special resolution once in every five years starting from the date of grant of such special right.
[1] ‘specified securities’ means ‘equity shares’ and ‘convertible securities’ as defined under clause (eee) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018
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