Entry And Exit Strategies For Businesses: An Overview

• Published date: 04 August 2021
• Subject Matter: Corporate/Commercial Law, Government, Public Sector, Inward/ Foreign Investment, Corporate and Company Law, Directors and Officers, Securities, Shareholders
• Law Firm: King, Stubb & Kasiva
• Author: Bishak Sharma

An establishment, private in terms of holdings, limited by securities of varying proportions - from equity to preference to debentures, guarantees etc. - carrying along with it differential rights accorded thereof, will, at a certain point of time, look at expansion.

Expansion translates directly into money. More manpower, more office area, more geographical outreach, advanced technology - these measures require funds that the company, along with its founders, directors, and shareholders, may not exactly be in a position to provide. By definition, a private company is barred from reaching out to the general public to raise any capital required for expansion. The Securities and Exchange Board of India (SEBI), India's primordial watchdog, has, by its very constitution, sworn to protect the general public from petty unregistered entities looking to make a quick-buck while trying to circumvent strict and accurate regulations put in place with the sole objective to safeguard the common man. Penalties for doing so are extremely harsh, ruthless and has no regard whatsoever for "the corporate veil". T.G Venkatesh vs Registrar of Companies¹, Ashok J Shah vs State of Gujarat², amongst many more, are noteworthy examples. This leaves the domestic and the global private sector with no choice but to pursue other options such as financial institutions, individuals with high net worth or fellow business entrepreneurs interested in funding the company looking to make excellent market profits upon their exit.

While the law governs such an expansion broadly, the tiny but exemplary details involved in such a transaction can only be captured through an adept shareholding agreement, primarily with due reference to the law and also through safe mechanisms to ensure managerial control, conditions regarding inflow of funds and profits in terms of both shareholder value as well as year-on-year income from business activities. Like the saying goes, it's all in the details. Such is the importance of a shareholding agreement; it targets the very root of a company's lifestyle.

Amongst other modes, entry in lieu of ownership of a company is best accomplished if it is through its shares. This method (acquisition of ownership of company through shares) is the safest and most preferred route, especially when the acquisition is legally backed by the Apex Court (like in the V.B Rangaraj vs V.B Gopalakrishnan³case) that incorporates the terms of a shareholding agreement into the articles of...