Advocate Aditya Singha

Questions Answered by Advocate Aditya Singha

Q: How to get out of an an option contract

I am an owner of a business startup. We have received an option contract from a buyer to buy our business subject to due diligence with an open-ended expiry date. The terms are they will provide loan, pay the staff, provide a monthly budget as a "going concern" business to reach positive revenue state. The directors of the company already spent 4 weeks and none of the above has been fulfilled. Buyer is just asking for more documentations we do not have and must produce. I would like to get out of the option contract so we can act on other offers before the business die. Can we (the seller) willingly fail the due diligence ?

Advocate Aditya Singha answered
The most important question here is to check if there is any exclusivity term in your Term Sheet / Memorandum of Understanding / Letter of Intent etc., that specificially restricts you from engaging with any other potential investor or buyer. These restrictions may or may not be time bound. Normally, early stage investments do not take a significant time for due diligence unless there are serious flaws or gaps in record keeping. In any case, the option to exit from any potential arrangement would depend solely on what has been agreed upon. Generally, there are exclusivity periods within which the diligence is completed, and depending on the agreed terms, you can terminate the existing arrangement or simultaneously search for other investors.

Q: questions regarding entitlement of shares

I am 90% shareholder of a Pvt company, total authorised capital is 5 lakh of 5000 shares of Rs.100 each. Paid up capital is Rs.90,000 for 900 shares. Now I want to exit the company if the company valuation is today Rs.20 lakh, then how much I am entitled for. Am I entitled only equivalent to 900 shares for which I have paid or I am entitled for 90% 5000 shares?

Advocate Aditya Singha answered
Hi,The first thing you must keep in mind is that since your company is a private limited company, its shares are generally not as freely transferable as the shares of a public listed company. This means that even if someone values your company's shares to be worth INR 20 lakh, you would still need a buyer willing to purchase those shares from you. Technically, you are only eligible to sell those shares which are paid-up, that means, shares which are registered in your name and for which you have paid the necessary amounts to the Company. Since your paid up capital is worth 900 shares, you can only sell those 900 shares. Coming to valuation, if someone has valued your entire company at INR 20 lakh, this means that such person has valued each share to be INR 400 per share (INR 20 lakh/5000 shares). So the value of your shareholding, technically, is 900*400 = INR 3,60,000/-But here's the interesting bit. If you are considering to completely sell your shareholding, you can command a price greater than just the value of the shares based on valuation. There are certain aspects concerning your shareholding in the Company that you can use to your advantage to obtain a greater price, provided you have a willing buyer.

Q: What can be correct share division for PPP of a company in India

Me and my Australian co-founder are registering a company in Australia and have a plan to bring it to India in future. We started the company together, something like a 50-50 partnership thing. Now that we have decided to register it in Australia, he is suggesting 30% equity for him and a 8% for me considering the PPP(purchasing power parity) values in Australia and India. According to PPP, he said we need to share it in 4:1 ratio (32-8) and the rest for investors and stuff. I need some legal advice on this and also, how should we share equity after starting the Indian branch ?

Advocate Aditya Singha answered
There is no legal restriction or prohibition or regulation concerning the manner in which the capital of a company may be divided. It is entirely up to the parties to mutually agree to a ratio. Using the PPP is not prohibited by Indian law so it could be one of the ways in which the ratio is decided. Ultimately, the only requirement under Indian law is that a private limited company must have at least 2 shareholders and at least 1 director resident in India. Barring that, the parties are free to decide on the capital ratio and contribute the capital to the company.

Q: What all Documents & agreements are required for seed funding round

Hi, what all agreements are reached & documentation is required between a founder & an investor before receiving a seed fund. Can any one please mention an exhaustive list.

Advocate Aditya Singha answered
Before you even start discussing the mechanics and terms of any arrangement, you must enter into a detailed Non Disclosure Agreement with the Investor. This protects your startup from any unauthorized disclosure of sensitive information being shared with the Investor. Even if the deal does not go through, the NDA is an extremely important document.The term sheet is also a vital document that reflects an understanding of some basic aspects of the proposed funding. It's importance lies in the fact that it captures the deal mechanics, logistics and commercial understanding of the parties so as to avoid any misconceptions in the future. It also acts as the base for the investment agreement. The investment agreement is the definitive binding document that ultimately results in the funding coming into the startup and appropriate instruments being issued to the Investor. It captures in details the manner in which the funds would come in and other commercial and legal aspects. It's one of the most important document and requires extensive analysis in order to avoid any potential liabilities and litigation. Any Investor receiving rights to the company through seed investments would also execute a shareholders agreement. This sets out the rights and liabilities of each party with respect to each other and third parties in their capacity as security holders of a company. Ancillary documents such as requisite internal authorisations and approvals, secretarial documents, compliance/waiver certificates etc. Are also some documents that assist in plugging any potential loopholes that may be exploited by parties.

Q: SC held that arbitration clause is defective file a recovery suit

I had a contract with some exporter to export rice in Madagascar,the contract was having a clause of Arbitration which was included by the exporter. When the dispute arose,I found that the International Chamber of Commerce & Industry,New Delhi doesn't exist anywhere. I filed an Arb.Petition in SC the SC held that your arbitration clause is defective file a recovery suit. Pls suggest what do I need to do now?

Advocate Aditya Singha answered
First, you may wish to discuss with him in case this was a situation of an honest mistake, and rectify the arbitration clause through mutual consent, before referring it to the appropriate body. However, if the exporter is not agreeing, you may file a petition under Section 11 of the Arbitration Act, 1996 before the High Court of Delhi to have the court appoint an arbitrator to resolve your issues since the agreement contemplated both parties agreeing to arbitration. However, further details may only be provided upon a review of the agreement.