Agreements and Contracts

Agreements and Contracts play a vital role in business transactions as these help to outline disclosures, expectations, business relationship and guidance during conflicts and protects interests of parties in an equitable manner.

Here are some common business agreements and contracts:

  1. Intellectual Property Agreements like Trademark

A Trademark simply provides a unique identity to your goods or services creating a brand imagein the eyes of consumers thereby attempts to gain consumer trust. It prevents usage of any similar mark by any other competitor in the market without legal permission of the owner. Brand strengthening is also possible through a registered mark that also helps gain confidenceof the consumers. There can also be agreements for assignment of Trade Marks or IPRs which needs to be very carefully drafted for preventing misuse.

  1. Non-Disclosure Agreement (NDA)/ Confidentiality Agreements:

NDA is another first set of documents that will protect the start-up ventures and safeguard your novel business idea from unauthorized disclosure and exploitation of intellectual property rights. An NDA details out the following:

  • definition of confidential information;
  • its ownership and manner of handling;
  • time range obligation for restricted information disclosure or for which the confidentiality will be maintained, etc.

  1. Foreign Collaboration Agreement:

With global outreach and technical advancement, Foreign Collaborations have become an important driver of growth in the country. Foreign Collaboration Agreement is a contract/ an arrangement between two or more companies from different countries entered for exchange of technical know-hows, technical designs and drawings, training of personnel or other exchange of services for mutual benefit. It requires government approval, taxation aspects and other additional legal formalities. In order to ensure quick processing of proposed foreign collaboration arrangements, Central Government have issued guidelines on this regard.

  1. Agency Contract

This contract holds importance when the business is conducted not directly by the company/ entity but through their agents appointed on their behalf to deal with the goods or services of the company/entity. Agency contracts exhibit certain peculiar characteristics of its own inter alia providing for the date of commencement and of termination, scope and nature of the agency, exclusivity, commission, competition (non-compete), liability, reimbursement of expenses, safeguarding of IPRs, etc.

  1. Consultancy Agreements

Agreements for Consultants or Consultancy Agreements are generally entered into when any entity intends to engage any person or party for limited period or for a particular assignment and not as a regular employee. There is no employer-employee relationship in this case and the consultant is not typically entitled to the benefits enjoyed by the employees, unless it is specifically mentioned and agreed upon in the agreement. The agreement provides for scope, nature and terms of engagement, fee or other incentives or provision of work etc.

  1. Partnership Agreement

A Partnership Agreement is an agreement between two or more parties intends to carry a business or arrangement in a partnership that is used to establish the responsibilities, and profit and loss distribution of partners, as well as other governing rules about the general partnership, like withdrawals, capital contributions, and admission or retirement or expulsion of partners.

  1. Terms of End User License Agreement (EULA) and Privacy Policy for Website and Application based software

As the businesses in current scenario is not being restricted by the physical presence, to expand visibility of business and widen the customer base, most growing businesses are looking to have their websites and apps to market their start-up and its products and services. Currently, the most valued companies are the one which have strongholds in both offline and online (e-commerce)business as online opportunities are tremendous but with it, the risks for online businesses are also manifold.

Terms of use agreement and privacy policy is intended to be an agreement between the Website or App owner and its user. It includes limitations on how the site can be used complying with the Information Technology Act read with Rules framed there under and with appropriate disclaimers, liability limitations, disclosure on the site’s privacy policy in dealing with customer information, copyright protection warnings, and much more.

  1. Employee contracts and offer letters

Employee contracts are essential to any organization in order to safeguard the employer-employee relationship. Such contracts may include terms and condition of employment (e.g., compensation, role responsibilities, working hours and grounds for termination), reporting structure, expectations, non-compete, required commitments, share vesting and company policies (e.g., vacation days, paid time off the structure, dress code etc.). Considering that huge amount of time and resources go into training and development of employees, such employment contracts can be with or without bonds for minimum continuation of services.

  1. Founder’s agreement

In case of start-ups with multiple founders or founding parties, it becomes necessary for them to sign an agreement that defines the working coordination or relationship of all parties, and form outlines to define boundaries. It is to prevent any conflicts or deadlocks in the future. The agreement should describe the relationship of the founders, provide the probability that all work will belong to some entity in the future and outline a basic communication and conflict-resolution clause that can help prevent disputes.

  1. Share Purchase Agreement

A Share Purchase Agreement is an agreement between the buyer and seller(s) for purchase of company’s shares. For a business takeover transaction, by purchasing all shares, the buyer gets control over the company, thus he not only acquires company’s assets, but also its liabilities and exposure to risks. Due to this, potential buyers undertake due diligence of such company before making investment.

Due diligence entails analysing the company’s business transactions, permits, licences, authorizations, agreements, liabilities, assets, borrowings, and so on. This aids in comprehending the company’s operations as well as potential liabilities that may occur in the future for buyers.

In addition, the due diligence results might be integrated into the Share Purchase Agreement. Any action that the company or the sellers must do in the near future can be listed. Similarly, any potential liabilities that have been identified can be disclosed, and the sellers can provide an indemnification for the same. In buyer’s interest, such indemnity from Sellers needs to be as exhaustive, descriptive and elaborative as possible for future safeguards.

  1. Shareholder’s Agreement or Joint Venture Agreement

The Shareholders’ Agreement is a contractual arrangement that specifies the shareholders’ rights and obligations, regulates the management of the company, ownership of shares, limitation on transfers, rights and privileges, voting and various protective provisions for shareholders.

It is usually entered into by the investors with the existing shareholders in case of new investors or between a group of shareholders or joint venture partners before commencing business in the investee company. It seeks to address such issues that may become contentious in future. Unlike Articles of Association, it is binding only on the parties to the agreement.

While drafting such agreements, following clauses should be carefully considered and negotiated:

  • General Commitments. A Shareholder Agreement (SHA) contains standard provisions dealing with the management of the company and the relationship between the shareholders (e.g., right to appoint directors, board and management agreements, provision for distribution of profits and risks, restrictive covenants, shareholding, buy and sell rights, tag along and drag along rights, matters requiring unanimous approval of the Board of Directors, the provision of financial information, and confidentiality provisions, etc.)

  • Arrangement as to ownership of shares. To protect interest of the shareholders, a SHA may provide for provisions as to pre-emptive rights to existing shareholders (or a right of first refusal to purchase such shares) in case of issue of further shares by the company or a sale/transfer by existing shareholders.

  • Information rights. A SHA may provide for the annual or quarterly financial and management information reports of the company and limitations/ restrictions on appointments of Statutory and Internal Auditors with reporting mechanisms. It may include standard inspection rights to inspect the books of accounts and other documentation upon a request reasonably made on that behalf.

  • Board of Directors. A SHA may typically provide for the day to day management or supervision of the company by the Board of Directors including provisions for appointments to the Board or one level below the Board like appointment of KMPs/ CEO/ MD/ CFO, size of board, remuneration or other matters concerning the board proceedings. It may also define the operational Roles and Responsibilities, decision making, specific obligations of the Investors, Founders or the JV Partners for the business of the Company.

  • Non-competeand non-disclose clause. Shareholders will often have access to a company’s trade secrets, standard operating procedures, customer and source lists, research and development, financial details and other sensitive or confidential information. A SHA may include non-disclosure and non-competition clauses that bind shareholders to secrecy and prevents them from working for, with or on behalf of competitors or such other parties that could damage the interests of the company.

  • Buy-back Clause. A company may offer buy back of shares if it has surplus funds to invest in or to maximize it profits or to increase its shareholding to prevent any hostile takeover etc. A buy back clause in a SHA in such case offers an exit opportunity to the dissenting shareholders or minority shareholders who might not be interested in the business anymore.

  • Valuation Clause. As the market ratios are volatile, it becomes necessary to specify a formula to be used to calculate the purchase price of a departing shareholder’s shares. A SHA may provide for a method to determine the ‘fair price’ of shares or a ‘fair market value’ in the manner as provided under law or as may be agreed by the parties on that behalf. It may include appointment of suitable qualified valuers who can be involved in setting the purchase price formula, as they should be able to guide on approaches taken by comparable companies in valuing the shares of departing shareholders.

  • Exit Clause or Liquidation Preference Rights. The SHA is drafted on the basis that shareholders have agreed that they shall all work in the business and deliver an expected contribution to the company. It may provide for an exit clause wherein in the event of Liquidation, net Consideration shall be distributed. It may even provide for a liquidation preference right to receive a greater proportion of the remaining value of the company over the others and rights for Intellectual Property Rights (IPRs) of the business.

  • Abnormal Exit Clause.The SHA allows the company to pay a lower price for the shares of a bad leaver, e.g. a shareholder who is required to leave the company for failing to make their expected contribution or for material breach of the agreement. Mandatory transfer of shares at nominal value may be included in the Agreement.

  • Deadlock Resolution and Dispute Resolution. The SHA consists of clauses for remedying a deadlock situation for continuity among partners/ shareholders and a dispute resolution mechanism clause by way of mode, jurisdiction, applicable laws, and appointment rights for Arbitrator etc.