Why the agreement matters
In closely held and investor-backed companies, the shareholders’ agreement (SHA) usually decides how control is shared and how a shareholder leaves. When relations break down, the first documents opened are the SHA and the articles of association. Ambiguity in either is expensive.
Clauses to settle
- Reserved matters. A list of decisions that need the consent of a named shareholder — new issues of shares, borrowing above a limit, change of business, related-party deals, budgets and key appointments.
- Board composition. Who may nominate directors, quorum for board meetings, and what happens if a nominee is unavailable.
- Transfer restrictions. Lock-in, right of first refusal or first offer, and permitted transfers to relatives or affiliates.
- Tag-along and drag-along. Rights of minority holders to join a sale, and of a majority to require a sale by all, with minimum price and conditions.
- Exit. Put and call options, buy-back and valuation methodology, including who chooses the valuer and the date of valuation.
- Deadlock. A stepped process — escalation to principals, mediation, then a defined exit mechanism — so that a split board does not paralyse the company.
- Non-compete and confidentiality. A restraint that continues after a person ceases to be a shareholder is open to challenge under Section 27 of the Indian Contract Act, 1872; restraints during the relationship are treated differently. Draft with that in mind.
- Dispute resolution. Governing law, seat and venue, arbitration rules and the number of arbitrators, interim relief carve-outs, and whether mediation comes first.
Align the articles
Provisions that are meant to bind the company, and to control share transfers in a private company, should also be incorporated in the articles of association; an agreement among shareholders alone may not bind the company in the same way. Where the agreement and the articles conflict, the dispute begins with which one governs. Listed companies are subject to additional securities regulations that affect these clauses.
Check it periodically
Each fundraising, new shareholder or change in management is a moment to review the SHA and the articles together, and to update the statutory registers.
General information, not advice. Terms of an agreement must be drafted for the specific parties and transaction. See contract drafting and enforcement and company-law compliance and advisory.