Are you confused about the difference between promoters and shareholder agreements? Well, you are not alone. These two legal documents are essential for any company looking to raise capital or attract investors. While both promoters and shareholder agreements are significant in their own right, they serve distinct purposes and operate at different stages of a company's life cycle.
In this article, we will explore the key differences between promoter agreements and shareholder agreements, shedding light on their roles, functions, and the contexts in which they come into play. Understanding these distinctions is crucial for entrepreneurs, investors, and anyone involved in the formation and operation of a business, as it helps navigate the legal landscape effectively and ensures a harmonious and well-structured corporate environment.
Let’s start with the basics first!
What are shareholders’ agreements?
Shareholders' agreements are legally binding contracts entered into by the shareholders of a company. These agreements outline the rights, responsibilities, and obligations of the shareholders, as well as the rules governing their relationship and the management of the company. Shareholders' agreements are typically used in privately held companies, where there is a smaller group of shareholders who are actively involved in the decision-making and operation of the business. The purpose of a shareholders' agreement is to establish a framework for how the company will be governed and how certain critical issues will be handled.
What are promoters’ agreements?
Promoters' agreements are contracts entered into by the individuals or entities who are responsible for initiating and organizing the formation of a company. Promoters' agreements serve as a contractual framework that governs the relationship and responsibilities among the promoters themselves. These agreements are typically drafted and executed before the formal incorporation of the company and often contain provisions that lay the foundation for the future operation and management of the business.
Who are Shareholders? What are the types of shareholders?
Individuals, organizations, or entities that own shares or stock in a company are called shareholders. By holding shares, shareholders become partial owners of the company and have certain rights and privileges associated with their ownership.
According to Section 2(84) of the Companies Act ( 2013), India, a shareholder is defined as ” a person who is the registered owner of shares in a company or who holds shares of that company and whose name is entered as a beneficial owner in the records of a depository.”
Types of shareholders can vary based on several factors, including the nature of the company and the way shares are distributed. Here are some common types of shareholders:
- Individual Shareholders: These are individuals who own shares in a company. Individual shareholders can include founders, executives, employees, or individual investors who have purchased shares.
- Institutional Shareholders: Institutional shareholders are organizations such as banks, insurance companies, pension funds, mutual funds, and other investment firms that invest in shares of various companies on behalf of their clients or as part of their investment portfolios. These entities usually hold a large number of shares in multiple companies.
- Common Shareholders: Common shareholders are the most common type of shareholders in a company. They have voting rights in the company's affairs and may receive dividends if the company distributes profits to its shareholders. Common shareholders typically bear higher risks but also have the potential for higher returns.
- Preferred Shareholders: Preferred shareholders have a higher claim on the company's assets and earnings compared to common shareholders. They typically have fixed dividend rights and may have additional privileges, such as priority in receiving dividends or assets in the event of liquidation. Preferred shareholders usually do not have voting rights or have limited voting rights.
- Public Shareholders: Public shareholders refer to individuals or entities that hold shares in a publicly traded company. Publicly traded companies have their shares listed on a stock exchange, allowing anyone to buy and sell their shares on the open market.
- Controlling Shareholders: Controlling shareholders are individuals or entities that hold a significant number of shares in a company, giving them a controlling interest and the ability to influence major decisions and the overall direction of the company.
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Who are Promoters? What are the types of promoters?
An investor or promoter is a person who invests money into the company's equity and has a stake in the company's success. A promoter is someone who has a stake in a company and is involved in its success. They may be an owner or an investor. The promoters are not only shareholders but also contribute their time, effort, and expertise to the company's goals in addition to owning shares.
They have voting rights within the company but do not have major decision-making power.
According to Section 2 (69) of the Companies Act ( 2013), India, a promoter is defined as -
- Any person who has been named as such in a prospectus or is identified by the company in any other manner.
- Any person who has control over the affairs of the company, directly or indirectly, through the holding of shares or management rights.
- Any person who has been instrumental in the formation of the company or has been actively involved in the promotion or establishment of the company.
It is important to note that the term 'promoter' in Indian Corporate Law is inclusive, not exhaustive. It includes anyone who had a personal interest in its organization and establishment.
There are several types of promoters:
Professional Promoters – The promoter usually promotes a company and then transfers it entirely to the shareholder agreement once it has been established. In developed economies, such promoter systems are widespread, but in developing nations, they have not developed enough.
Occasional Promoters – People who take a promotion with one company and then return to their original profession afterwards. Lawyers who float a company will be occasional promoters. Most people become occasional promoters for personal reasons.
Financial Promoters - When the economy is booming, financial institutions play a crucial role in promoting and financing companies.
Managing Agents - A promoter can also be the managing agent of a company. A managing agent manages the floating company after it has been established. Indian managing agencies are no longer used.
Now that you have got a fair idea of who promoters and shareholders are and what their different types are, let’s proceed to how the Promoters' agreements and Shareholders' Agreements differ.
How Do Promoters and Shareholder Agreements Differ?
In India, both promoter agreements and shareholder agreements are legal documents that regulate the rights and responsibilities of parties involved in a company. However, they differ in their purpose and the parties they govern. Here's how promoter agreements and shareholder agreements differ:
- Timing: Promoter agreements are entered into during the formation stage of the company, whereas shareholder agreements are typically entered into after the company's incorporation when shareholders are already in place.
- Parties Involved: Promoter agreements involve the promoters of the company who are instrumental in its formation, while shareholder agreements involve the shareholders of the company.
- Scope and Content: Promoter agreements primarily focus on the arrangements and obligations among the promoters, including their roles, contributions, and cooperation during the initial stages of the company. Shareholder agreements, on the other hand, primarily address the rights and obligations of the shareholders, including their relationships with each other, governance matters, and shareholder rights.
Conclusion
The promoter is the individual who owns the company and oversees its direction. The shareholder is the individual who invests in the company and owns shares. Several benefits can be gained by having a Promoter or Shareholder Agreement in place. These agreements can help to protect the interests of all parties involved and can provide clarity on key issues such as roles and responsibilities, ownership percentages, and decision-making processes.
Having a Promoter or Shareholder Agreement in place can also help to avoid potential conflict between shareholders and can provide a mechanism for resolving disputes should they arise.
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