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Agreements

In India, from the business registration point of view, under profit generating business kind, there are 5 major business entity types.  There are quite a number of agreements that come into play based on entity type; on the other hand, there are agreements that will come to play as your business grows. This blog will enlighten you with the different kind of Corporate Agreements and contracts that the company would require during fundraising scenario.

 

#1: Shareholders’ Agreement:


Every shareholder, when they trade money for Shares in the company, enters a Shareholder’s agreement.  This contract confers the rights and imposes obligations over and above those provided by company law.

This contract defines rules like:

  • Restrictions on transfer of shares
  • Restrictions on forced transfers of shares
  • Nomination of directors for representation on boards
  • Quorum requirements
  • Veto or supermajority rights


#2: Agreement for underwriting shares of a company:


When the existing shareholders of the company or the public do not subscribe to the securities offered to them, and company decides to allot number of shares to the underwriter who subscribes to the securities.


Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure that the public will subscribe for the entire issue of shares or debentures made by the company. The financial agency is known as the underwriter and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission.


The underwriting agreement defines rules like:

  • Period during which the agreement is in force
  • The amount of underwriting obligations
  • The period within which the underwriter has to subscribe to the issue after being intimated by the issuer
  • The amount of commission if any

 

#3: Listing Agreement:

Listing means an admission of securities to dealings on a recognized stock exchange. The securities may be of any public limited company, Central or State Government, quasi-governmental and other financial institutions/corporations, municipalities, etc. Listing Agreement is between the company the listing platform.

 

The objectives of listing are mainly to:

  • provide liquidity to securities;
  • mobilize savings for economic development;
  • protect interest of investors by ensuring full disclosures.

 

#4: Share Purchase Agreement:

 

This Agreement comes into play when an individual (generally the equity investor) buys shares from the company.

 

This Agreement lays down rules like:

  • Terms and conditions
  • Rights exercisable
  • Disagreements resolutions criteria
  • Criteria under which sale of the Equity Investor’s shares can take place


Wazzeer has developed packages for startups that have plans to raise funds from internal and external sources, to discuss the same -> “Get Started!”

 

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Agreements

Let’s take a situation here, say there are two organizations- A and B. A enters a contract with B to outsource tech team. The Contract is a well vetted and very much valid contract drafted by an experienced Lawyer. Now, say the contract was breached by Organization B for some reason. In this article, we will look into the solutions that Organization A has, which basically answers our first question ‘What could be the consequence of breaching an Agreement or Contract in India?’

Compensation for loss or damage caused by breach of contract

Organization A who suffers by such breach is entitled to receive from Organization B a compensation for any loss or damage caused.

Compensation for breach of contract where penalty stipulated for

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the Organization A complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the Organization B.

Party rightfully rescinding contract, entitled to compensation

A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.

Compensation for failure to discharge obligation resembling those created by contract 


When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.


Examples of scenarios where the breach of contract takes place:

  • Firm P contracts to buy of Firm Q, at a stated price, 50 mounds of rice, no time being fixed for delivery. P afterward informs Q that he will not accept the rice if tendered to him. Q is entitled to receive from A, by way of compensation, the amount, if any, by which the contract price exceeds that which Q can obtain for the rice at the time when P informs Q that he will not accept it.
  • Firm P contracts to buy Q’s ship for 60,000 rupees, but breaks his promise. P must pay to Q, by way of compensation, the excess, if any, of the contract price over the price which Q can obtain for the ship at the time of the breach of promise.
  • Firm P contracts to repair Q’s Office in a certain manner and receives payment in advance. P repairs the house, but not according to contract. Q is entitled to recover from P the cost of making the repairs conform to the contract.


In conclusion, if a contract is valid it is enforceable to protect parties that are affected by the breach in some way or the other. We at Wazzeer provide the flexibility to clients by including specific clauses to protect the client from any disputes and as well ensure to provide a guarantee of service.

 

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Acquisitions, Agreements

1. Acquisition of Shares:

 

Acquisitions may be via an acquisition of existing shares of the target, or by subscription to new shares of the target. 

 

 a. Transferability of Shares:

 

Depending upon the entity type, the eligibility and procedure of carrying out this process will change. For instance, maximum membership of private limited company is 200, and transferability of shares is governed by the AoA as guided by the Company Act, 2013. While acquiring shares of a private company, it is therefore advisable for the acquirer to ensure that the non-selling shareholders (if any) waive any rights they may have under the articles of association.

 

In case of a Public Limited Company, Shares are easily transferable. Any transfer of shares, whether of a private company or a public company, must comply with the procedure for transfer under its articles of association.

 

b. Squeeze out procedures:

 

Situations where there is already Contracts held by shareholders of the Transferee company, such sensitive situations guided by specific sections of Company Act, 2013.

  • Section 395 of the CA 1956 – Section 395 envisages a complete takeover or squeeze out without resort to court procedures. Governs when Contracts between shareholders.

 

  • Section 236 of the CA 2013 – Under the CA 2013, if a person or group of persons acquire 90% or more of the shares of a company, then such person(s) have a right to make an offer to buy out the minority shareholders at a price determined by a registered valuer in accordance with prescribed rules.
  • Scheme of the capital reduction under section 100 of the CA 1956 – Section 100 of the CA 1956 permits a company to reduce its share capital in any manner and prescribes the procedure to be followed for the same.
  • Section 186 of CA 2013 provides for certain limits on inter-corporate loans and investments.

 

2. SEBI Regulations

 

If the acquisition of an Indian listed company involves the issue of new equity shares or securities convertible into equity shares (“Specified Securities”) by the target to the acquirer, the provisions of Chapter VII (“Preferential Allotment Regulations”) contained in ICDR Regulations will apply (in addition to company law requirements mentioned above).

 

3. Takeover Code

 

If an acquisition is contemplated by way of issue of new shares, or the acquisition of existing shares or voting rights, of a listed company, to or by an acquirer, the provisions of the Takeover.

 

Merger and Acquisition are two business decisions that have to be securitized up by qualified Lawyer and Accountant. Starting from due diligence till contracts signing, ensuring that nothing is been hidden or executing things smoothly is a task. Wazzeer understands the requirements thoroughly and delivers a well-consulted end to end legal, accounting, and secretarial service to our clients, all you have to do is ->“Get your Wazzeer”

 

 

 

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Agreements

E-commerce laws and regulations in Indian startup ecosystem are still evolving, but the general laws like – Company Law, IP Law etc., are applicable to these E-commerce businesses as well. In this blog one such secretarial compliance matter which is governed by Contract, Act is what we will be looking at- The top 12 Agreements and Contracts for an E-commerce startup.  Remember, disputes and differences are bound to occur in an online-commercial environment too. Contracts and norms are something pivotal that keeps your disputes and legal woes at bay.


A contract or an Agreement creates and defines obligations between two or more parties and is enforceable by law.  Contracts contain a proposal made by either of the parties to do or abstain from doing a particular action. Most of the contracts templates are available for free on the world wide web, but the unfortunate fact is entrepreneurs have little to no knowledge on validating a contract,  as in, if the contract is actually enforceable under law or not.  We at Wazzeer strongly believe contracts and Agreements are not something that can be taken as a toss but has to drafted with care and intelligence.  In order to make some of your lives simpler, in case you want to validate a contract by yourself, these are the essential elements a valid contract must consist:


  • Proposal and Acceptance.
  • Intention to create legal relationship
  • Lawful Consideration
  • Competent Parties
  • Free Consent
  • Legal Object
  • Not expressly declared void by law.
  • Certainty and possibility of performance
  • Compliance with legal formalities




Moving on, let’s look at the Top 12 Contracts and Agreements that are essential for an E-commerce startup:


  1. Founder’s Agreement: Apart from outlining the roles and responsibilities of the founding members of a company, it lets you know about the equity vested in them, the ownership of intellectual property created by them etc. It covers various aspects of the venture that the founders are about to undertake, even the consequences of their departure or death. 
  2. Website terms & Policies: Most users ignore the terms of service agreement and privacy policy prominently displayed on any website, but all entrepreneurs know their importance. It states that any information which is being gathered by any website will not be disclosed to the third party without any permission or legal action. According to the Information Technology Rule, 2011 in India there is a corporate body to provide a privacy policy for handling of or dealing with personal information, making the privacy policy a must-have for websites. [Disclaimer: A disclaimer is a statement/notice informing the user of any product or service of the possible consequences of the same. The law mandates the display of a disclaimer in certain cases, such as where there is an inherent risk of harm to one’s health] but used commonly in all product and service literature.  It is used in situations which involve an element of risk or uncertainty.
  3. Memorandum of Understanding (MOU): A Memorandum of Understanding is a document in which two or more parties declare that they agree on a common course of action or business. It is the first stage of the making of a contract. To be legally operative, a MoU must: 
  • identify the contracting parties
  • spell out the subject matter of the agreement and its objectives                            
  • summarize the essential terms and must be signed by the contracting parties
  1. Vendor Agreement: It is a comprehensive agreement covering various aspects of the vendor such as the quality of goods supplied or service provided, duration of the contract, terms, and mode of payment. This comes in handy when there are several sellers out in the picture.
  2. Non-solicitation Agreement: This contract is useful where an employee agrees not to solicit a company’s clients or customers, for his or her own benefit or for the benefit of a competitor, after leaving the company. It may also include not provoking other employees to leave when he/she quits or otherwise moves on.
  3. Joint Venture Agreement: This agreement is entered into by a group of persons or companies to do business together or to collaborate on a particular project without losing their individual legal identities. This is legally-binding in areas of profit sharing and operations. Before entering into this, you are supposed to sign the MoU along with the parties.
  4. Non-Disclosure Agreement: NDA is a legal contract stating that certain information is confidential, and the extent to which its disclosure is restricted to third parties. It can be entered into with a person or organization. Confidential information includes trade secrets, business plans, business methods and strategies, drawings, charts and more. Software programs and code are also confidential information. 
  5. Non-compete Agreement: A contract between two parties, where one party agrees not to compete with the other for a period of time. It lessens the possibility that knowledge gained by an employee or business partner will be used in the future to compete against them. In return, for not competing, the party is paid a fee. This agreement outlines the duration of the agreement, any geographical limitations, and what subjects or markets it covers.
  6. Contract of sale: This contract binds the seller and buyer on their duties – the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale. This contract cover clauses like: Rules regarding delivery.
  7. Return Policy: This Contract binds the buyer to follow a set of rules and guidelines to qualify a good for a return, as well the rules the buyer has to abide by when the return of product circumstance comes up.
  8. Master Service Agreement: This Agreement permits the buyer and seller to quickly negotiate future transactions or agreements because they can rely on the terms of the master agreement, so that the same terms need not be repetitively negotiated, and to negotiate only the deal-specific terms.
  9. Service-level agreement (SLA): Agreement that guarantees buyer that Particular aspects of the service – quality, availability, responsibilities – are agreed between the seller and the buyer.

 

We at Wazzeer are fully equipped to provide you all the required assistance to run a fully compliant E-commerce startup in India, feel free to contact us. We are just a click away ->”Get your Wazzeer” 🙂

 

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Agreements, Co-Founder agreement

Would just a good idea be sufficient to invest your money and effort into it, all based on “the Trust Factor”? No, people change as time passes by, crucial decisions like entering into a firm as a Co-founder is even more important. I am going to be describing a real-life example of a Cofounder who entered into a business relationship with his friend as a co-founder (let’s name him X and his cofounder Y).  


X and Y were college friends, Y one fine day, proposed his startup idea to X and convinced him to join the business as a Co-founder. X entered into the startup as a founder investing $50K, speaking of the reality that is huge money that anyone could even imagine of investing in a startup that was still in the ideation stage.  


The mistake that X did was believing solely on the “The Trust Factor” did not pay due to attention to drafting a “Co-founders Agreement” not even an exit plan in place. A reach shows, in Indian startup ecosystem, a whopping 53% of startups do the same mistake. If you are someone who could relate to this scenario, go ahead read the available options for you.

  1. Litigation
  2. A Legal notice intimating the co-founders about your interests to exit.
  3. If the startup is registered as a Private Limited Company, call for a board meeting.

The complication of the situation can be eased up based on the entity type you chose to register your startup as.


Greater Goodness if you had a legal Agreement or contract in place: If you did, then these are your options:


  1. Termination of contract Notice: Contract termination is a drastic step and should be done with caution and with proper legal advice. Clauses addressing the situation of exit will determine if the parties can go for exit based on –
  • Breach of contract, or
  • At will

  1. Reformation:

Reformation allows two parties to modify a contract so that it more accurately reflects what the parties intend.  This remedy requires that the contract to be valid.  It may be available when one of the parties had a mistaken understanding of a material term of the contract.

 

When a contract is terminated, it is often said that it “comes to an end” or “ceases to exist”.  However, these statements are somewhat misleading as the contract not only continues to exist but continues to have an operation in some respects.  What is in fact “terminated” is the future performance of the contract – that is, the primary obligations of the parties that have been partially performed at the time of termination and those that would have fallen due for performance had the contract not been terminated.


We at Wazeer think of all these situations and provide a detailed consultation to our clients upfront, all with a motive to provide right information upfront. We would be happy to help you in this matter -> “Get your Wazzeer” 🙂

 

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Agreements, Co-Founder agreement

Importance of asking the right questions to the founding even before creating an entity will protect the organizational culture and safeguard relationships in the long run. Perhaps Co-founders’ agreements is the product of conversations that should take place among a company’s founders at the early stages of formation rather than later in the life of a company. The goal of these conversations is to have an open and honest discussion about the attitudes, fears, and aspirations of individuals involved with the startup. In this blog, we will look at the Top 28 Questions to ask your Co-founders before entering Co-founders Agreement. It is essential to have this conversation – Answering these hard questions now will help you and your co-founders avoid personal conflicts in the future.

 

Strategy

  1. What goals does each of us have for the start-up?
  2. What goals do we have for ourselves?
  3. What are our respective timelines for these goals?

 

Ownership Structure

  1. Who gets what percentage of the company?
  2. What will we each contribute to the company? (e.g., duties, job descriptions, hour commitments, roles, and responsibilities).
  3. How much capital are we each contributing and for what?
  4. Is the percentage of ownership shares subject to vesting based on continued participation in the business?

 

Management

  1. How are key decisions and day-to-day decisions of the business to be made? (e.g., by majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?).
  2. What salaries (if any) are the founders entitled to? How can that be modified?
  3. What happens if one of us wants to leave?
  4. If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
  5. What happens if one of us wants to sell the company, raise money, or kill the company?
  6. What happens if one of us becomes disabled or dies?
  7. What happens if it takes us longer than we expected to get our product up and running? Can we each launch other startups while working on this project
  8. Under what circumstances can a founder be removed as an employee of the business?
  9. What happens if one founder is not living up to expectations under the Founders’ Agreement? How would this situation be resolved?
  10. If it turns out the business is not taking off and we decide to end our venture, can one of us take the idea and try it again?
  11. If we need to raise start-up capital, where will it come from and how much of the company are we willing to give in exchange for that start-up capital?

 

Factors that may be considered in an unequal distribution of equity include:

  1. Who came up with the idea that is the key to the Business Concept;
  2. Who has the greatest stake in the IP in the Business Concept;
  3. Who developed the technology necessary to run the Business Concept;
  4. Who owns the patents on which the Business Concept or its products will be based;
  5. Whether any Founder brings existing copyrights or trademarks into the Company;
  6. Which Founders are providing the start-up capital for the Business Concept and in what percentage contribution;
  7. How much time has each Founder invested in the development of the Business Concept;
  8. Whether all Founders are full-time contributors to the development of the Business Concept;
  9. What was the opportunity cost for each Founder to help create the Business Concept? Those who sacrificed more lucrative, high-power positions at established businesses are often compensated more for their risk than those who were not actively employed when the venture began; and
  10. Who has the industry expertise necessary to get the Business Concept going?

 

It is always helpful to have clear clauses in the Co-founders’ agreement for resolving the conflict as that will avoid confusion and uncertainty and save time and money. The conversation that you have with your founding team will decide the meat of Co-founder’s Agreement – The Agreement lays out the rights, responsibilities, liabilities, and obligations of each founder.

 

Remember, Start-up process entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly. For any Legal and Accounting support, Happy to help you, let us talk! 🙂

 

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Secretarial Compliance, Share Certificate, Transfer of Shares

Shares, like any other property, is an investment in a business which can be sold out, when something like that happens the process is called transfer of shares. Shares held by an investor are presumed to be capable of transfer unless the company has restricted the right to transfer them by a provision in its articles, or the shareholder has entered into a contract, such as a shareholders’ agreement, not to transfer the shares. This article is structured to help shareholders understand the methodology of Transfer of shares – What, Why, and How may it be done.

Statutory provisions:

  1. Section 56 of Companies Act, 2013
  2. Rule 11 of Companies (Share Capital & Debentures) Rules 2014
  3. Provisions are given in model articles of association given in Table ‘F’ of Schedule-I



Procedure for Transfer of Share in a Private Company:

 

Generally, articles contain the detailed provisions as regards to the procedure for transfer of shares. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—

 

  1. Transferor should give a notice in writing for his intention to transfer his share to the company.

 

  1. The company, in turn, should notify to other members as regards the availability of shares and the price at which such share would be available to them.

 

  1. Such price is generally determined by the directors or the auditors of the company.

 

  1. The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.

 

  1. If none of the members comes forward to purchase shares then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.

 

  1. Get the Share transfer deed in form SH-4 duly executed both by the transferor and the transferee.

 

  1. The transfer deed should bear stamps according to the Indian Stamp Act and Stamp Duty Notification in force in the State concerned. The present rate of transfer of shares is 25 Paise for every one hundred rupees of the value of shares or part thereof. Do not forget to cancel the stamps affixed at the time or before the signing of the transfer deed.

 

  1. The signatures of the transferor and the transferee in the share transfer deed must be witnessed by a person giving his signature, name, and address.

 

  1. Attach the relevant share certificate or allotment letter with the share transfer deed and deliver the same to the company. The share transfer deed should be deposited with the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.

 

  1. After receipt of share transfer deed, the board shall consider the same. If the documentation for transfer of share is in order, the board shall register the transfer by passing a resolution.

 

 

Procedure for Transfer of Share in a Public Company:

 

Section 58(2) provides that the shares or debentures and any interest therein of a public company shall be freely transferable. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—

 

  1. Get the Share transfer deed in form SH-4 duly executed both by the transferor and the transferee.

 

  1. The transfer deed should bear stamps according to the Indian Stamp Act and Stamp Duty Notification in force in the State concerned. The present rate of transfer of shares is 25 Paise for every one hundred rupees of the value of shares or part thereof. Do not forget to cancel the stamps affixed at the time or before the signing of the transfer deed.

 

  1. The signatures of the transferor and the transferee in the share transfer deed must be witnessed by a person giving his signature, name, and address.

 

  1. Attach the relevant share certificate or allotment letter with the share transfer deed and deliver the same to the company. The share transfer deed should be deposited with the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.

 

  1. After receipt of share transfer deed, the board shall consider the same. If the documentation for transfer of share is in order, the board shall register the transfer by passing a resolution.

 

 Main Provisions related to Transfer of Share:

 

  1. Instrument for Transfer of Share is compulsory: Section 56 provides that a company shall not register a transfer of shares of, the company, unless a proper transfer deed in Form SH.4 as given in Rule 11 of Companies (Share Capital & Debentures) Rules 2014 duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company, along with the certificate relating to the shares, or if no such certificate is in existence, along with the letter of allotment of the shares.

 

  1. Time Period for deposit of Instrument for Transfer: An instrument of transfer of shares i.e. Form SH.4 with the date of its execution specified thereon shall be delivered to the company within sixty (60) days from the date of such execution by or on behalf of the transferor and by or on behalf of the transferee.

 

  1. Value of share transfer stamps to be affixed on the transfer deed: Stamp duty for transfer of shares is 25 paise for every Rs. 100 or part thereof of the value of shares as per Notification No. SO 130(E), dated 28-01-2004 issued by the Ministry of Finance, Department of Revenue, New Delhi.

 

  1. Time limit for issue of certificate on transfer (Section-56(4)): Every company, unless prohibited by any provision of law or of any order of any Court, Tribunal or other authority, shall, within One month deliver, the certificates of all shares transferred after the application for the registration of the transfer of any such shares, debentures or debenture stock received.

 

  1. Private company shall restrict right to transfer its shares: Entire shareholding of a private company may be owned by a family or other private group. Section 2(58)(i) of the Companies Act, 2013 provides that the Articles of a private company shall restrict the right to transfer the company’s shares.

 

  1. Restriction on transfer in Private Company not applicable in certain cases: Restriction upon transfer of shares is in private company are not applicable in the following cases:

 

(i) on the right of a member to transfer his/her shares cannot be applicable in a case where the shares are to be transferred to his/her representative(s).

 

(ii) in the event of the death of a shareholder, legal representatives may require the registration of share in the names of heirs, on whom the shares have been devolved.

 

Note: Restriction should not be in the form of prohibition and Restriction can only be by the Articles of Association.

 

  1. Time Limit for Refusal of registration of Transfer: Provisions related to Refusal of registration and appeal against refusal is given in Section 58 of the Companies Act, 2013. Power of refusal to register transfer of shares is to be exercised by the company within thirty (30) days from the date on which the instrument of transfer or the intimation of transfer, as the case may be is delivered to the company.

 

  1. Time Limit for appeal against refusal to register Transfer by Private Company: As per section 58(3), a transferee of shares may appeal to the Tribunal against the refusal within a period of thirty (30) days from the date of receipt of the notice from the Company or in case no notice has been sent by the company, within a period of sixty (60) days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

 

  1. Time Limit for appeal against refusal to register Transfer by Public Company: As per section 58(4), a transferee of shares may, within a period of sixty (60) days of such refusal or where no intimation has been received from the company, within ninety (90) days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

 

  1. The penalty for Non-compliance: Where any default is made in complying with the provisions related to transfer of shares, the company shall be punishable by a fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.

 


Start-up process entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly. For any Legal and Accounting support, Happy to help you, let us talk!

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Agreements

Our basic understanding intimates that – when one party fails to fulfill the conditions of the contract then the agreement is considered breached.  Well, there is more to that, it depends upon the nature of the contract itself. The breach can occur during complex and simple transactions as well.Breach of contract is easy to prove during the specific contract but it may be difficult to prove it is not a specific contract or it is vague. Section 73, 74 and 75 of the Indian Contract Act deals with the Breach of Contract. Breach of contract leads to frustration for the parties involved and also the wastage of time and money. 

A breach occurs when:

  1. When one party does not perform his part of duty.
  2. When something prohibited is done by the party.
  3. When customer prevents the contractor to do his part of the job or finishing the project at hand.
  4. When time is the essence of the contract and the contractor does not do his work completed on time.
  5. It is at the option of the other party to breach the contract or not when the time is not the essence of the contract and the performance has not happened on time.
  6. The contract is voidable or can be breached if the performance is not done according to the requirements of the contract. For example: when the product is not according to the size, shape, color, design, quantity or quality etc.
  7. When it is impossible to perform the contract.
  8. Contract with minor is void.
  9. When other party does not do the work and refuses it to do before the completion of time period or fails to do.
  10. Delay in the delivery of the product and harassment can cause a breach of contract.


Types of Breach:

  • MATERIAL BREACH- this breach occurs when one party fails to perform his part of the contract and causes loss or damages to the other party.
  • FUNDAMENTAL BREACH- this allows the aggrieved party to stop performance of the contract and sue for damages.
  • MINOR BREACH- in this, you cannot sue the person for actual performance but for partial breach. There is an option for the party either to sue for damages or ask the other party to correct their mistakes or perform his duty as per the requirements.
  • ANTICIPATORY BREACH- when one party breaks the contract by not executing his/ her part of the contract within the allocated time.



Remedies that businesses or individuals can take in response to such a  situation:

  • Liquidated damages– these are specified in the contract.
  • Compensatory damages– compensate for losses and reimburse the cost.
  • Attorney’s fees– it is recoverable when expressly included in the contract.
  • Punitive damages– it is given for the offensive behavior or action for the defendant.


There is a strong reason why we decided to write a blog on this topic. We at Wazzeer have recently encountered with entrepreneurs seeking a third view on their existing Agreements to react or send notice on breaching of agreements. Being caught up in core business activities is definitely a priority, but when things like Agreement breaching goes un-noticed, would land your company as such in problems. We at Wazzeer will be happy to ensure that nothing ever goes wrong in your legal and accounting matters, ‘Get a Wazzeer’ 🙂

 

 

 

 


 

 

 

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Secretarial Compliance, Share Certificate

What are ‘Shares’? Shares are units of ownership interest in a company that provides for an equal distribution of any profits, if any are declared, in the form of dividends. This blog typically is going to walk you through the stuff that is Just the right things to know about Shares.

 

Two major types of shares are

 

(1) Ordinary shares (common stock), which entitle the shareholder to share in the earnings of the company as and when they occur, and to vote at the company’s annual general meetings and other official meetings.

 

(2) Preference shares (preferred stock) which entitle the shareholder to a fixed periodic income (interest) but generally do not give him or her voting rights.

 

 

Different Kind of shares

 

  1. Equity share

 

Equity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary from year to year. This rate of dividend is determined by directors and in case of larger profits, it may even be more than the rate attached to preference shares. Such shareholders may go without any dividend if no profit is made. The investors of equity shareholder are the risk taker. Equity shareholder has stake in the company and control in terms of voting power in their hand, they can change the decision of the management if they think that the decision will not give benefit to them in long term.

 

  1. Preference share

 

Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, although under some agreements these rights may revert to shareholders that have not received their dividend. Preferred shares have less potential to appreciate in price than common stock.

 

Some preferred stock is convertible, means it can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date at which it automatically converts. Whether this is advantageous to the investor depends on the market price of the common stock. Preference shareholder enjoys the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate of dividend.

 

There are four types of preference shares:

 

(a) Cumulative Preference Share

 

If the company does no earn an adequate profit in any year, dividends on preference shares may not be paid for that year. But if the preference shares are cumulative such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company, in subsequent years. Only after such arrears have been paid off, any dividend can be paid to the holder of quality shares. Thus a cumulative preference shareholder is sure to receive the dividend on his shares for all the years out of the earnings of the company.

 

(b) Non-cumulative Preference Shares

 

The holders of non-cumulative preference share no doubt will get a preferential right in getting a fixed dividend it is distributed to quality shareholders. The fixed dividend is to be paid only out of the divisible profits but if in a particular year there is no profit as to distribute it among the shareholders, the non-cumulative preference shareholders, will not get any dividend for that year and they cannot claim it in the next year during which period there might be profits. If it is not paid, it cannot be carried forward. These shares will be treated on the same footing as other preference shareholders as regards the payment of capital is concerned.

 

(c) Redeemable Preference Shares

 

Capital raised by issuing shares, is not to be repaid to the shareholders (except buyback of shares in certain conditions) but capital raised through the issue of redeemable preference shares is to be paid back to the company to such shareholders after the expiry of a stipulated period, whether the company is wound up or not. A company cannot issue any preference shares which are irredeemable or redeemable after the expiry of a period of 10 years from the date of its issue. It means a company can issue redeemable preference share which is redeemable within 10 years from the date of their issue.

 

(d) Participating or Non-participating Preference Shares

 

The preference shares which are entitled to a share in the surplus profit of the company in addition to the fixed rate of preference dividend are known as participating preference shares. After the payment of the dividend, a part of surplus is distributed as dividend among the quality shareholders at a particulate rate. The balance may be shared both by equity shareholders at a particular rate. The balance may be shared both by equity and participating preference shares. Thus participating preference shareholders obtain the return on their capital in two forms (i) fixed dividend (ii) share in excess of profits. Those preference shares which do not carry the right of share in excess profits are known as non-participating preference shares.

 

  1. Bonus share

 

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends but are converted into free shares.

 

The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of a number of shares held to the number of shares outstanding. Companies issue bonus shares to encourage retail participation and increase their equity base. When the price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared. A bonus issue is usually based upon the number of shares that shareholders already own. Bonus shares are issued:-

 

  • to capitalize a part of the company’s retained earnings

 

  • for conversion of its share premium account, or

 

  • distribution of treasury shares.

 

  1. Sweat Equity share

 

Sweat equity shares refer to equity shares given to the company’s employees on favorable terms, in recognition of their work. It is one of the modes of making share-based payments to employees of the company. The issue of sweat equity allows the company to retain the employees by rewarding them for their services. Sweat equity rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, it enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.

 

  1. Employee stock option

 

An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time. An employee stock option is slightly different from an exchange-traded option because it is not traded between investors on an exchange.

 

Ways to issue shares:

 

Some of the major methods of issuing corporate securities are as follows:

 

  1. Public Issue or Initial Public Offer (IPO):

Under this method, the company issues a prospectus to the public inviting offers for a subscription. The investors who are interested in the securities apply for the securities they are willing to buy. Advertisements are also issued in the leading newspapers. Under the Company Act, it is obligatory for a public limited company to issue a prospectus or file a statement in lieu of prospectus with the Registrar of Companies.

 

Once subscriptions are received, the company makes allotment of securities keeping in view the prescribed requirements. The prospectus must be drafted and issued in accordance with the provisions of the Companies Act and the guidelines of SEBI. Otherwise, it may lead to civil and criminal liabilities.

 

Public issue or direct selling of securities is the most common method of selling new issues of securities. This method enables a company to raise funds from a large number of investors widely scattered throughout the country. This method ensures a wider distribution of securities thereby leading to diffusion of ownership and avoids concentration of economic power in a few hands.

 

However, this method is quite cumbersome involving a large number of administrative problems. Moreover, this method does not guarantee the raising of adequate funds unless the issue is underwritten. In short, this method is suitable for reputed companies which want to raise large capital and can bear the large costs of a public issue.

 

  1. Private Placement:

In this method, the issuing company sells its securities privately to one or more institutional brokers who in turn sell them to their clients and associates. This method is quite convenient and economical. Moreover, the company gets the money quickly and there is no risk of non-receipt of minimum subscription.

 

The private placement, however, suffers from certain drawbacks. The financial institution may insist on a huge discount or other conditions for the private purchase of securities. Secondly, it may not sell the securities in the market but keep them with it.

 

This deprives the public a chance to purchase securities of a flourishing company and there may be a concentration of the company’s ownership in a few hands. The private placement is very suitable for small issues, particularly during a depression.

 

  1. Offer for Sale:

Under this method, the issuing company allots or agrees to allow the security to an issue house at an agreed price. The issuing house or financial institution publishes a document called an ‘offer for sale’. It offers to the public shares or debentures for sale at a higher price. The application form is attached to the offer document. After receiving applications, the issue house renounces the allotment in favor of the applicants who become direct allottees of the shares or debentures.

 

This method saves the company from the cost and trouble of selling securities directly to the investing public. It ensures that the whole issue is sold and stamp duty payable on the transfer of shares is saved. But the entire premium received is retained by the offerer and not the issuing company.

 

  1. Sale through Intermediaries:

In this method, a company appoints intermediaries like stock brokers, commercial banks, and financial institutions to assist in finding the market for the new securities on a commission basis. The company supplies blank application forms to each intermediary who affixes his seal on them and distributes it among prospective investors. Each intermediary gets the commission on a number of security applications bearing his seal. However, intermediaries do not guarantee the sale of securities.

 

This method is useful when a company has already offered 49 percent of the issue to the general public which is essential for a listing of securities. The pace of sale of securities may be very slow and there is uncertainty about the sale of a whole lot of securities offered through intermediaries. But this method saves the administrative problems and expenses involved in direct selling of securities to the public.

 

  1. Sale to Inside Coterie:

A company may resort to subscription by promoters and directors. This method helps to save the expenses of a public issue. Generally, a percentage of the new issue of securities is reserved for subscription by the inside coterie who can in this way share the future prosperity of the company.

 

  1. Sale through Managing Brokers:

Sale of securities through managing brokers is becoming popular particularly among new companies. Managing brokers advise companies about the proper timing and terms of the issue of securities. They assist companies in pre-issue publicity, drafting and issue of the prospectus and getting stock exchange listing. They also enlist the support and cooperation of share brokers.

 

  1. Privileged Subscriptions:

When an existing company wants to issue further securities, it is required to offer them to existing shareholders on prorate basis. This is known as ‘Rights Issue’. Sale of shares by rights issues is simpler and cheaper as compared to sale through the prospectus.

 

But the existing shareholders will subscribe to the new issues only when the past performance and future prospects of the company are good. An existing company may also issue Bonus Shares free of charge to the existing shareholders by capitalizing its reserves and surplus.

 

 

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Legal, Share Certificate

Ideally Shareholders should keep this document safe, but things going missing is rare but plausible. This article talks about how entrepreneurs should act when your share certificates goes missing. The certificates act as physical proof of the ownership of the shares and transfer of a share certificate generally was legally recognized as transfer of the equivalent amount of company stock.

 

Learning from a real case: Smt. Kulwant Kaur vs Unitech Ltd on 13 October, 2015

 

FACTS:

  • Kulwant kaur is a original allottee of 100 shares
  • Kulwant claimed that in June, 2006, the original sharecertificate were misplaced by her
  • Kulwant informed the police about the misplacing of the sharecertificate.
  • Kulwant made repeated requests to the company board for issuance of duplicate sharecertificate,
  • However, the company paid no heed to her request,
  • The present suit is filed for directions that the company board be directed to issue the duplicate  sharecertificates to Kulwant.
  • Kulwant also prayed that the company board shall be restrained from the alienating, selling or transferring the 100 shares certificatesto any other indented purchaser.
  • Kulwant had details of document registered folio no. 9354

 

OBSERVATIONS BY THE COURT:

  • After hearing the submissions of both the parties and after going through the pleadings, documents and evidence, it is observed by the Court that the main ground for seeking the direction from the Court is that the original sharecertificate have been lost.
  • As per Section 84(2) of Company Act, 1956 is the relevant provisions which deal with the issuance of duplicate share certificate.

 

ADMITTED FACTS:

  • It was clear that the Share holders usually trade shares through share broker and after receiving the consideration amount from share broker share holder hands over the share certificate to the share broker along with signed blank transfer deed. 
  • It was also admitted by Kulwant that she was not aware as to whom the share broker further sell share certificate
  • The abovementioned admission on the part of the plaintiff comes within the ambit of existence of course of business under Section 16 of Indian Evidence Act. 

CONCLUSION:

  • The combined effect of facts that the police complaint is very vague and has not provided anything as to at what time or on what date or as to where the documents have been lost, Kulwant has admittedly not made any further complaint to any police or any authority when admittedly a person called her and conveyed that he had original share certificates with him .
  • Kulwant has suppressed the same fact from the court and also has not made that person as party to the suit despite the fact that the defendants revealed the name of that person who is having the original share certificates with him, gives a prima­facie indication that the share certificates might have been handed over to some share broker after taking consideration and the present suit has been filed against the company to obtain duplicate share certificate without any basis.



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