PPT on contracts

Choosing the Right Legal
Structure & Importance of
Legal Contracts
A Practical Perspective &
its Procedural Nuances
By Savitha Kesav Jagadeesan
Senior Partner (Kochhar & Co)

Key Takeaways
 Best form of entity for your business model
 It’s pros and cons
 Importance of Contracts
 Fundamental Rules of
 Company Incorporation/Memorandum of
Understanding
 Founders Agreement
 Shareholders Agreement
 Employee Agreement

Choosing the best Legal Entity
for your Business Model
 SOLE PROPRIETORSHIP
 PARTNERSHIP
 ONE PERSON COMPANY
 LLP
 PRIVATE LIMITED COMPANY

Factors to Consider while choosing the
Legal Structure
FLEXIBILITY
CONTROL &
MANAGEMENT
CAPITAL
REQUIREMENT
TAXES
LICENSES
PERMITS
&
REGULATIONS
COMPLEXITY
RISK &
LIABILITY
NATURE SCALABILITY
FLEXIBILITY PROFIT

Basic Features of Sole
Proprietorship
Owned and run by
one person
No separate legal
entity
Sole proprietor:
Bears all risk
Enjoys all benefits
Sole proprietor owns all
the assets of the business

Pros of Sole Proprietorship
MANAGEMENT
FLEXIBILITY
SOLE
DISCRETION
WHEN IT COMES
TO COSTS
QUICK
RESPONSE TO
EVENTS
COMPLETE
POWER OVER
DECISION
MAKING
EASY SETUP/
FORMATION
COSTS PROCEDUREPAPERWORK
LESS
GOVERNMENTAL
CONTROL
LESS SUBMISSION
OF DOCS
MINOR
COMPLIANCES
SUBJECT TO
FEW
REGULATIONS
TAX
ADVANTAGES
OWNER IS NOT
DISTINCT FROM
ENTITY
ONE SOURCE
OF TAXATION
SIMPLER
TAXATION
PROCEDURES
EASY
DISSOLUTION
NO LEGAL
PROCESS
EASY PAYOUT
CEASE
OPERATIONS

Disadvantages of Sole Proprietorship
UNLIMITED
PERSONAL
LIABILITY
DEATH OF THE
PROPRIETOR =
TERMINATION
OF BUSINESS
DIFFICULTY IN
RAISING
CAPITAL/
FINANCING
UNCERTAIN
BUSINESS LIFE

PARTNERSHIP
19-Nov-18 8
CONTRACT
2 TO 20
VOLUNTARY
MUTUAL
AGENCY
SHARE PROFIT
AND LOSS

PROS
separate Legal Entity
• Perpetual succession
• Property ownership
• Liability issues
• Legal
CONS
19-Nov-18 10

Private Limited Company
DISADVANTAGES:
 Fees of Incorporation is
relatively costlier than
other entities
 Process & requirements
of company registration
are complex
 Series of compliance
requirements has to be
met
 Tax liability

ONE PERSON COMPANY
19-Nov-18 12
Separate legal
entity
Requires
registration
Formality driven
Credit
history=funding
Liability issues

ONE PERSON COMPANY
19-Nov-18 13

One Person Company
 Financial statements of an OPC can be signed by one
director alone.
 Cash flow statement is not a mandatory part of financial
statements for an OPC
 OPC to file financial statements with required documents
within 180 days from closure of the year
 As per Section 96(1) of the Companies Act, 2013, the
provision relating to holding of AGM is not mandatory for
OPC.
 Provision for compulsory rotation of auditor in Section
139(2) are not applicable to OPC

Practical Difficulties of an OPC
COSTS
SAME
NUMBER OF
ENTITIES
RESTRICTED
RAISING
FUNDS
CONVERSION:
• 2 years has
expired from the
commencement
of business, or
• Specified limits
has been
achieved
COMPULSORY
(Forced) Conversion:
Where an OPC has paid
up capital of Rs. 50
lakhs or more or the
Annual Turnover during
relevant period exceeds
Rs. 2 crore, the company
has to forcibly convert
itself into a Private
limited company

Limited Liability Partnership
• No limit on maximum partners (unlike private limited
company)
• No requirement of minimum contribution
• Lower cost of formation
• No requirement of compulsory audit
• Lower compliance burden resulting in savings
• No dividend distribution tax is payable
• Provision of deemed divided under income tax law is not
applicable
• Conversion from a general partnership firm to LLP will
have no tax implication, if :
• the rights & obligations of partners remains the same
after conversion
• There is no transfer of any asset or liability after
conversion.
Benefits
of LLP
over
limited
company:

Demerits of LLP
Cannot raise Venture Funding: LLP cannot raise venture, seed or angel funding in an LLP.
Long time to Register: An LLP takes generally 25 – 30 days working days to register (considering the
time taken to issue PAN as well)
Varied rights of partners: LLP can be structured in such a way that one partner has more rights than
another. It is not one vote per share system. Hence partners with lesser rights may feel compromised.
Greater Penalties: LLP’s compliances are minimal, but if it is not complied with, then it would attract
more fines which may escalate up to Rs. 5 lakh for a single year.
Restricted Access to Capital Markets: LLP cannot list its shares in any stock exchange, hence difficult
to attract outside investors
Limitation in Formation: LLP cannot be formed by a single person
FDI: Foreign Direct Investment in in LLP is allowed only through Government route
ECB: LLPs are not allowed to raise External Commercial Borrowing. LLP cannot avail commercial loans
from its foreign partners, FIIs, Foreign Banks.

Distinction between Company and
Partnership
COMPANY PARTNERSHIP
Distinct legal person Partnership is not distinct from its partners
Property of he company belongs to the
company and not to the individuals comprising
it
Property of the partnership firm is the
property of the individuals comprising it
The creditors of a company can proceed only
against the company and not against its
members
The creditors of a partnership firm are
creditors of individual partners and a decree
against the firm can be executed against the
partners jointly and severally
Members of a company are not its agents Partners are the agents of the firm
A member of a company can contract with his
company
A partner cannot contract with his firm

Distinction between Company and LLP
COMPANY LLP
Governed by Companies Act, 2014 and various
rules made thereunder
Governed by the Limited Liability Partnership
Act, 2008 and various rules made thereunder
The word ‘Limited’ or ‘Private Limited’ is
added with the name of a company
The word ‘LLP’ or ‘Limited Liability
Partnership’ is added with the name of a LLP
Each Director required to have a DIN before
being appointed as a Director of any company
Each Designated partner required to have a
DPIN before being appoint as a Designated
Partner of LLP
Minimum two members for private company
and minimum seven members are required for
public company as per the Companies Act,
2013
Minimum two partners are required for the
formation of a LLP
Maximum of 200 in case of Private Company
and unlimited number of member in Public
Company as per the Companies Act, 2013
No cap of maximum number of its partners

Importance of Contracts
Serves as an official
record of the business
agreement
Provide security and peace
of mind
Drawing a boundary of
Privy & excluding
outsiders of any claims
List out your remedies
Define the scope of the
contract
Better enforceability of
written contracts than
oral agreements
Proof of details Minimizes Risk Fix your Timelines

Contd…
Guaranteed confidentiality
Prevent misunderstanding
Defining rights & limiting
obligations of each party
Binding & Legally
enforceable
Avoid expensive litigation
proceedings
Define what happens in
the event of breach

FUNDAMENTAL RULES
FOR INCORPORATION
OF A COMPANY

Bird’s Eye View of Incorporation
Application for availability of
Name of Company
Filing of Documents with
ROC
Documents of Incorporation to be
preserved
Issue of Certificate of
Incorporation
Punishment for furnishing false or
incorrect information at the time of
incorporation
Powers of the Tribunal in case of
incorporation of a company by
furnishing false information

STEPS TO BE TAKEN TO INCORPORATE A NEW
COMPANY
SELECTING A NAME
“ Name is given to a human child after the Child is born.
Whereas a Corporate Child will be born along with a name”
Ministry of Corporate
Affairs provides a portal to
facilitate “Name Selecting
Process”
Applicant to select 1 -6
suitable names (in order
of preference)

COMPANIES CAPABLE OF BEING REGISTERED (Section 3 r/w
Section 366 Companies Act, 2013)
 A company may be formed for any lawful purpose by—
Company to be formed by subscribing their names to a memorandum
and complying with the requirements of the Companies Act, 2013 in
respect of registration.
Public company
7 or more persons
Private Company
2 or more persons
One Person
Company
By one person

Filing of Documents with ROC-Sec 7(1)
The following Documents need to be filed that ROC where the
Registered office of the company is proposed to be situate:
MOA, duly signed
Declaration of
Compliance of Act &
Rules
Name of State where
Regd. Office is
proposed
Affidavit
Particulars of every
Subscriber
Particulars of persons
mention in AOA as
Directors
His interest in other
firms or bodies

MEMORANDUM
OF THE
COMPANY
[FORM SPICe
MoA]
In pursuance of
Section 4 of the
Companies Act, 2013,
memorandum shall
state—
• name of the company
(except Companies with
charitable objects u/s 8 of
the Act) with the last word
“Limited” for public
limited company, or

MEMORANDUM OF THE COMPANY
[FORM SPICe MoA]
In pursuance of Section 4 of the Companies Act, 2013, memorandum
shall state—
4. liability of members of the company, whether limited or unlimited, with:
 for company limited by shares, that liability of its members is limited to
the amount unpaid, if any, on the shares held by them; and
 for company limited by guarantee, the amount up to which each
member undertakes to contribute—
to the assets of the company in the event being wound-up (while he
is a member /within one year after he ceases to be a member)
for payment of the debts and liabilities of the company
to the costs, charges and expenses of winding-up and for
adjustment of the rights of the contributories among themselves;

ARTICLES
 The articles of a company shall contain the regulations for management of the
company in conformity with Section 5 of the Companies Act, 2013.
 They shall also contain such matters, as may be prescribed.
 A company may include additional matters in its articles as may be considered
necessary for its management.
 The provisions for entrenchment shall only be made in the articles :
 agreed to by all the members of the company (for private company) and
 by a special resolution (for public company).
 Where articles contain provisions for entrenchment, the company shall give notice
to the Registrar of such provisions.
 The articles of a company shall be in respective forms specified in Tables, F, G, H,
I and J in Schedule I as may be applicable to such company.

MEMORANDUM OF THE COMPANY
[FORM SPICe MoA]
In pursuance of Section 4 of the Companies Act, 2013, memorandum
shall state—
5. For a company having a share capital,—
● the amount of share capital with which the company is to be registered
● the division thereof into shares of a fixed amount and
● the number of shares which the subscribers to the memorandum
agree to subscribe (not less than one share); and
● the number of shares each subscriber to the memorandum intends to
take (indicated opposite his name);
1. For One Person Company,—
● the name of the person who, in the event of death of the subscriber,
shall become the member of the company. [One Person Company-
Nominee consent - Form INC-3]

FUNDAMENTAL RULES
FOR EMPLOYMENT
AGREEMENT

Employment consists of: a long-term or indefinite arrangement between an individual
undertaking to do the agreed work and an organisation paying him for the same.
• Employment Laws
• Employment Contracts
Employer-employee relations in India are governed by:
• Employments conditions: Factories Act 1948, Shops & Establishments Act, Contract Labour
(Regulation & Aboliton) Act 1970, Industrial Employments Standing Orders Act 1946
• Industrial relations: Industrial Disputes Act 1947, Trade Unions Act 1928
• Remuneration: Payment of Wages Act 1936, Minimum Wages Act 1948, Payment of Bonus
1965, Equal Remuneration Act 1976
• Social security benefits: Payment of Gratuity Act 1972, Workmen’s Compensation Act 1923,
Employees State Insurance Act 1948
• Welfare: Employees Provident Fund Act 1952, Maternity Benefit Act 1961.
The laws governing such relations can be categorized in accordance with
the Concurrent List under the Constitution :
EMPLOYER-EMPLOYEE RELATIONS
IN INDIA

• CTC
• LEAVE
• TERMINATION
• NON DISCLOSURE
• NON COMPETE
• NON SOLICIT
• BONDS
KEY CLAUSES
• JUDICIAL
INTERPRETATIONS
(COMMON LAW)
• INDIAN CONTRACT ACT
• Constitution of India
LAW
• Employment agreement aims to
reasonably balance the interests
of the employer and employees
while setting out the boundaries
of employer-employee relations.
• Contemporary employment
agreements incorporate clauses
pertaining to above matters to
remove ambiguity.
INTERPERSONNEL
ISSUES
• freedom of work and
livelihood of employees
• Reasonable restraints
• Work for hire
• Employment benefits
• Qualified exits
Telescopic view of the
clauses
EMPLOYMENT AGREEMENTS

FUNDAMENTAL RULES
FOR FOUNDERS
AGREEMENT

A founders’ agreement is a
contract between the co-founders
of a company (MY FAMILY
ARRANGEMENT)
It sets out the ownership, duties,
responsibilities, and the initial
investment of each founder.
Such agreement should be entered
at the incorporation stage of the
enterprise to ensure that the roles
of each founder are clearly defined.

WHY? FOR WHOM? FOR WHAT?
CONTRACT BETWEEN
PROMOTERS/FOUNDERS
OUTLINING EXPECTATIONS
PROVIDING MUTUAL
UNDERSTANDING
STREAMLINING INVESTMENTS
AND RETURNS
HIGHLIGHTING ROLES AND
RESPONSIBILITIES
TRACK AND PACE

ESSENTIALS OF FOUNDERS AGREEMENT
Capital
This clause states the initial investment made by each founder, as well as any additional capital
contributions that may be needed in the future from the founders for expansion and operational needs.
Ownership
Ownership clause deals with equity held by each founder, either by percentage, or the number of shares
held. The contribution provided and the role played by each co-founder helps determine his share in
equity.
Roles and responsibilities
 This clause eliminates any ambiguity by clearly specifying the role of each founder.
 Each co-founder owes a certain duty and responsibility to each co-founder as well as the enterprise
which is accounted for by this clause.
 It determines the decision-making power of each founder, as well as possible future relations with the
Board of Directors.
Compensation
This clause specifies the amount of compensation provided as well as the manner of reimbursement of
expenses

6. Restriction on Transfer of Shares:
 Co-Founders may have a lock-in clause prescribing number of years
before Co-Founder can transfer the shares.
 This clause incorporates provisions to deal with the situation in case
Co-Founder wants to exit the venture before lock in period.
7. IP Assignment:
Clause assigning IP rights to the enterprise so that they do not remain
the property of an individual is essential since the enterprise can lose
whatever valuation it attains if it in “real” sense does not own intellectual
property.

8. Exit of founders
 In order to prevent any conflict in the future, an exit clause must form part of a
founders’ agreement.
 There must be a provision for the case(s) in which a co-founder may choose to
leave the enterprise or be removed from the company including reasons of death
and illness.
9. Dissolution
 This clause the possibility of winding-up and liquidation of the enterprise.
 The manner of distribution of money and other resources amongst the founders in
the event of liquidation must be provided.
10. Dispute resolution
Clause specifying the manner of resolution of certain disputes is of utmost
importance since it facilitates the founders to resolve the dispute in a time-bound
manner and with cost efficiency.

11. Non-Compete:
 Conflict of interest of Co-Founder with the activities of the
Company dampens mutual trust and confidence between Co-
founders.
 An express non-compete clause must be recorded in a Founders
agreement, preventing a co-founder to engage in activities that
are in conflict with the objectives of the Company while they are
part of and for a certain number of years post exit.
 “Conflicting activities” must be clearly defined.

FUNDAMENTAL RULES
FOR SHAREHOLDERS
AGREEMENT

SHAREHOLDERS’ AGREEMENT
 Shareholders are considered to be the true owners of the
company. An agreement entered between the company
and shareholders describing the rights and obligations is
called the Shareholder’s Agreement.
 It helps to protect the investment made by a shareholder
and lays down the rules governing the relations of
shareholders with the company.

Shareholder’s agreement consists of the following basic
provisions:
 The proportion in which shareholder shall hold the shares.
 The different class of shares for different category of shareholders
(comprising of minority, majority & founder shareholders), if any.
 “Right of First Offer”: Any privilege of the existing shareholders of first
getting new issue of shares in the market.
 Right of board of directors to stop issuance or transfer of new issue of
shares.
 The restrictions on transfer of shares.
KEY CLAUSES IN SHAREHOLDERS’
AGREEMENT

A. SHAREHOLDERS’ NOMINATION AND ELECTION OF DIRECTORS
 The shareholders agreement should set forth the process by which individuals
are nominated by the shareholders to serve on the Company’s board of
directors.
 The agreement may also include a grant of a proxy to the nominating
shareholder by the other shareholders to vote in favour of its nominated
director(s).
 The agreement may include a clause to reduce or eliminate a shareholder’s
right to nominate a director and a provision for termination of the nomination
rights and voting obligations.
 This clause may also set out the shareholder’s right to remove that director
and substitute a successor to fill the vacancy.
AGREEMENT

B. CONSENT OF SHAREHOLDERS
This clause specifies matters where the consent of shareholder in
majority matters. For instance:
 appointment or dismissal of a member (manager, any member of the
supervisory board etc)
 drafting a financial statement or distributing the dividend.
 amendment of the articles of association.
 entering into amalgamation
 filing for bankruptcy
 dissolving the company
AGREEMENT

C. RIGHT OF FIRST REFUSAL
 Clause embodying this right protects the company and existing
shareholders from sales of stocks to a competitor company by any
shareholder.
 This clause states that when some shareholders intend to sell their
share have to show the right to match an offer received from a third
party.
D. BUY OUT RIGHTS
 The “buy-out rights” clause enunciates that when a shareholder is
found incompetent due to death, disability, bankruptcy, the company/
existing shareholders can buy the shares of such shareholder.
 It includes “expulsion” clause, enabling the existing shareholders to
expel any undesirable shareholder and acquire his/her shares.
AGREEMENT

E. DISPUTE RESOLUTION CLAUSE
To resolve issues with shareholders, an express provision in the
shareholders agreement should carve out the dispute resolution
mechanism to be adopted.
Companies should prefer opt for out of court settlements like arbitration or
conciliation between the company and shareholders.
AGREEMENT

FUNDAMENTAL RULES
FOR MEMORANDUM OF
UNDERSTANDING

Memorandum of Understanding (MoU) is merely an
agreement or promise between two or more parties.
It does not has any legal binding but it is stated that, as
it’s a simple agreement only but it has a legal value and
can be used as a tool for establishing a contract.
MoU can be established as an effective base for stating
out the objectives.
In India, MoUs are governed under Indian Contract
Act 1972.

Key
features and
contents
• It describes who are the parties to the agreement.
• Describes the projects on which the parties are
agreeing upon.
• The scope of the documents, which is thereby made
during the agreement.
• Sets out the roles and responsibilities of the parties.
• Although they are not legally binding but are
enforceable under Indian laws.
• Can involve any exchange of money or any valuable
consideration.
• Contains indemnification clause.
• Joint undertaking and responsibilities.
• The termination clause is also there for the parties.
• Dispute resolution clause.

THANK YOU
- Savitha Kesav Jagadeesan
Senior Partner
Kochhar & Co

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