This article is written by Simone Fernandes, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.com.
A corporation or an enterprising organisation engaged in commercial, manufacturing, or professional activities is referred to as a business. Businesses may be for-profit or non-profit businesses that are dedicated to a charitable project or a social cause. Each and every person who wants their business to be set up needs to comply with certain legal documentation to bring their business to life.
Legal documents and a business go hand in hand. Documentation tells the story of a company: its roots, goals, and the road it’s on to achieve them. Contracts enable your company to enter new markets and extend its scope, while other paperwork verifies your current position and gives investors and customers peace of mind. Legal documents give life to a business and help in sustaining its day-to-day activities. It is these legal documents that also prevent a business from being copied and bringing about uniformity in the working of its employees. It’s wiser to start protecting your business at the very start and not leave it until it’s too late. There are a number of key legal documents that are essential for a business and they are as follows:
1. Shareholders agreement
There are a lot of stakeholders that have put their resources behind every business that is up and running. Shareholders are the people that make up these important pillars in a business. In return for their money, they are given some shares in the company. This essentially means that the shareholder becomes one of the company’s shareholders and has some voting rights in key decision-making processes. A shareholder agreement is a legal document that binds the corporation and its shareholders together. It points out their rights, powers, and obligations. It ensures that no rules are broken and that people’s rights are protected. This document outlines the relationship between the company and its shareholders in detail so as to avoid any fallouts that may take place in the future.
General provisions of a shareholders agreement
Rights of a shareholder
A shareholder is given various rights in exchange for their investment in the business. Some of the rights that are usually given to shareholders are –
(i) Right to vote,
(ii) Right to call for a general meeting,
(iii) Right to appoint directors,
(iv) Right to ask for copies of the financial statements of the business,
(v) Right to appoint auditors and many other rights as the business may deem fit.
Requirements of a quorum
A quorum refers to the minimum number of members required for a meeting to be considered a valid meeting. The requirements with respect to a quorum based on the strength of the shareholders as well as that of the business will be clearly mentioned in the shareholders’ agreement.
Protection of minority shareholders
Minority shareholders are those who do not enjoy much in terms of powers when it comes to the management of the company. Since the introduction of the Companies Act, 2013, the rights of the minority shareholders have been given importance.
- Right to apply to the board in case of oppression or mismanagement.
- Right to institute a class action suit against the company and the auditors.
- The requirement to appoint a small shareholder director.
Sale/transfer of shares
When it comes to the question of share transfers, such laws have been placed in place to protect the interests of shareholders, ensuring that such transfers only take place with the consent of all parties concerned.
Valuation of shares
Since the stock market is often fluctuating, the value of a company’s shares fluctuates as well. The method of valuing the company’s shares, on the other hand, plays a major role and has a material effect on the financial statements in order to help in the proper preparation of the financial statements. The methods of valuation include –
(i) Assets approach,
(ii) Income approach and
(iii) Market approach.
2. Non-disclosure agreement
Businesses must keep running ventures, creative ideas, and revolutionary new products secret to retaining a competitive edge, should they fall into the hands of a rival. Companies that have a novel and lucrative concept will only prosper if they keep their plans hidden. A non-disclosure agreement, also known as an NDA, is a legal document that keeps such confidential information under wraps. The purpose of an NDA is essentially to prevent business confidential information from becoming public knowledge.
It is a written contract between two parties (people or organizations) that prohibits the sharing of confidential information that has been revealed to them. When confidential information is revealed to potential buyers, creditors, customers, or suppliers, a Non-Disclosure Agreement is commonly used. Confidentiality in writing, signed by both parties, will help to build confidence in these types of agreements and prevent intellectual property theft.
General provisions of a non-disclosure agreement
Definition of confidential information
The clause identifies the specific information that would be considered confidential information for the purpose of the agreement.
The terms and duration of the agreement
It should non-ambiguously state the terms and conditions of the agreement as well as the timeframe for which such confidential information shall remain confidential.
The return of the information
This clause specifies at the end of the project whether the confidential information is to be returned or destroyed and the manner in which it shall be done.
This clause signifies the absence of a permanent relationship and allows the party(s) to terminate the agreement at any point provided they abide by the relevant laws or contractual obligations.
It specifies the acceptable remedies available to the parties in case of a breach of the agreement.
3. Trademark : distinguishing the goods or services of one enterprise from those of other enterprises
A trademark is a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises. Trademarks are protected by intellectual property rights. A registered name can help you strengthen your business. It creates a brand image over time. The trademark is the unique identity that helps your services or products stand out from the rest. The Controller General of Patents, Designs, and Trademarks, under the Ministry of Industry and Commerce, registers trademarks in India. It is governed by the Trademark Act, 1999. Products or services offered under a registered trademark aid businesses to build trust, goodwill, reliability through the customer base.
Registering a trademark always gives you legal protection. Whenever you have any doubt of your trademark being used by someone else you can take legal actions through the help of this legal document. If a brand creates a name, popularity, the trademark becomes a valuable asset. Hence, trademarks of successful businesses can be contracted commercially, sold, and franchised.
The procedure for registering a trademark in India
This search is used to see if your company name or logo is identical to any other trademarks that have already been licensed. The trademark agent or attorney typically performs this search with the Trademark Office to see if any similar trademarks have already been licensed in that class. Online and offline searches are the two types of searches. It is suggested that both searches be done so as to be doubly sure that you can proceed with your trademark application. You can move on to the next step once you’ve established that your trademark is unique.
If your company name/logo is found to be distinctive, the trademark attorney will draft a trademark application based on the findings of the preliminary search. You must change your trademark if someone else has the same or a similar one. As soon as you fill out the form for a trademark application, you can use the TM symbol.
The Government levies a fee on the registration of trademarks which amounts to Rupees 4,500/- in the case of individual/ startup/small enterprise and Rupees 9,000/- in all other cases. Your application will be checked by the Trademarks Office to see if it has already been taken. A trademark objection would be filed if this is the case. It publishes an advertisement in the trademarks journal if there are no objections. If no other businesses object over the next four months, the trademark will be licensed six months later.
4. Employee contracts
Onboarding a new employee involves a lot of documentation. An employee contract is one such written document between the employer and the employee that defines the rights and responsibilities between the two. This contract sets the obligations and expectations of the company and employee in order to minimize future disputes. Not every hire requires an employment agreement, but the document can be useful if you want to dissuade certain new hires from leaving your company too soon, disclosing confidential information about your business, or going to work at a competitor. However, in the absence of a written agreement, the terms of the employment are subject to miscommunication and misunderstanding.
Constituents of an employment contract
Duration of employment
An employee can be employed on a long-term basis or for a limited time span. An employment contract establishes the length of time that an employee will be employed by the company.
It specifies the designation of the employee and the department he or she is expected to work in.
This is the employee’s salary details. It also includes information about the company’s perks, which are in addition to the salaries. Health care, holiday and sick leave, and spending reimbursements are only a few examples.
While a separate agreement is required for this provision, it can be included in the employment contract as well. It forbids the employee from engaging in any business or operation that is competitive with the company’s business or services for a fixed period of time after the company’s contract has expired.
A confidentiality provision can be included in an employment contract, particularly if the job entails dealing with sensitive information. This provision forbids the employee from sharing such information with anyone outside of work.
Role and responsibilities
An employment contract also specifies the scope of work for the employee. It outlines the responsibilities and tasks to be performed by the employee.
Notice for termination of the contract
It determines the length of the notice period that must be fulfilled if the employee terminates the contract. It also specifies the circumstances in which the employer can terminate the contract without giving the employee prior notice.
5. Terms and conditions
It’s important to decide on the terms of doing business with your clients while you’re selling goods or services. You must have the terms and conditions ready at all times during the lifecycle of your service, whether you are a supplier or a purchaser. As one of the most important legal documents, it should provide information about how to shape a business relationship.
The Terms and Conditions should cover the payment process in detail, as well as the distribution of goods or services, cancellation policies, and returns. It must have clauses in the contract to restrict the liability of the business as an owner and to limit the business’ liability in the event of insolvency or a dispute over the terms and conditions. Moreover, the terms and conditions are the main point of reference to resolve any dispute. Therefore, it has an impact on your business. Usually, standard terms and conditions apply however, a properly structured industry-specific document always helps.
The terms and conditions of any website ensure an online agreement between the client and the business. The page outlines the legal rights and obligations of each party associated. Alongside this, the terms and conditions page always offers a fair idea to the users on how to use the website. Without having the terms and conditions set for your website, your business gets exposed to the liabilities of the contents of the website. Any fault that arises on the customers’ side because of following the website’s data can drag you into a legal battle. The terms and conditions of your website also offer you the right to safeguard your own intellectual property along with your end users’ data.
The above-mentioned documents are 5 of the most quintessential documents that each and every business needs however there are still many others. Setting up a business in India requires compliance with a lot of laws and in turn needs legal documents to protect them from disputes.
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