Shareholders' agreement template for India

When you need this

• On any external investment, alongside the definitive documents
• Between co-founders, before the relationship needs it
• When a shareholder is departing and the transfer mechanics have to work
• Where board composition and veto rights need to be settled
• When an existing informal arrangement between founders is being formalised

What this document must contain

• Transfer restrictions — Right of first refusal or first offer, tag-along and drag-along. This is the core of the document — it determines who can end up as your co-shareholder.
• Board composition and appointment rights — Who nominates whom, and what happens when a shareholding changes. Appointment rights should be tied to a minimum holding.
• Reserved matters — The decisions requiring investor or founder consent. Keep the list proportionate: an over-long list makes ordinary operations require permission.
• Information and inspection rights — What financial and operational reporting shareholders receive, and how often. Vague reporting obligations produce recurring friction.
• Exit provisions — IPO, strategic sale, buy-back or put rights, and the timelines. Where a put right against the company is contemplated, its enforceability under Indian law needs checking.
• Founder vesting and leaver provisions — Good leaver and bad leaver outcomes, with definitions precise enough not to be argued about at the moment they apply.
• Amendment of the articles to reflect the agreement — The step that is routinely missed. Terms not carried into the articles are materially harder to enforce against the company.
• Dispute resolution — An arbitration clause with a named seat under the Arbitration and Conciliation Act, 1996, or a named Indian court. Decide it now.

The law that governs it

• Companies Act, 2013 — s. 6 and the articles — The Act has effect notwithstanding anything to the contrary in the articles or in any agreement. Shareholder arrangements that conflict with the Act do not survive, and terms intended to bind the company should be carried into the articles.
• Companies Act, 2013 — s. 58(2) — Securities of a public company are freely transferable, though a contract or arrangement between two or more persons in respect of transfer of securities is enforceable as a contract. The position differs for private companies, whose articles restrict transfer.
• Arbitration and Conciliation Act, 1996 — Where disputes are referred to arbitration, the clause should specify the seat, the number of arbitrators and the appointment mechanism. A vague arbitration clause produces a preliminary dispute about the dispute.

Common mistakes

• Signing the agreement and never amending the articles to match, which weakens enforceability against the company
• Drafting an over-broad reserved matters list that makes routine operations require consent
• Leaving good leaver and bad leaver definitions loose, so they are argued about exactly when they apply
• Assuming a term common in a US stock purchase agreement is enforceable in India without checking
• An arbitration clause with no named seat, which produces a dispute before the dispute

Frequently asked questions

Does a shareholders' agreement need to be reflected in the articles?

For terms intended to bind the company, yes in practice. The Companies Act, 2013 has effect notwithstanding anything contrary in the articles or any agreement, and Indian courts have treated restrictions not incorporated into the articles as materially harder to enforce against the company. Amending the articles is the step most templates omit.

What is the difference between tag-along and drag-along?

A tag-along right lets a minority shareholder join a sale by a majority shareholder on the same terms, protecting them from being left behind with a new controlling holder. A drag-along right lets a majority compel the minority to sell into an offer, so a buyer can acquire the whole company. They protect opposite interests and both usually appear.

Are reserved matters the same as board control?

No, and conflating them is a common error. Board control is about seats and votes; reserved matters are a consent list that applies irrespective of the board's composition. A minority investor with a long reserved matters list can hold more practical control than the shareholding suggests.

Should the SHA be stamped?

Where the instrument is chargeable with duty it should be stamped before execution, and rates are State-specific. Under s. 35 of the Indian Stamp Act, 1899 an unstamped chargeable instrument cannot be admitted in evidence — a poor position for the document that governs ownership of the company.

Related documents

• Non-Binding Term Sheet
• Board Resolution — Share Allotment
• Non-Disclosure Agreement (NDA)
• All templates