Key elements of Shareholders Agreement

This article is written by Purva Tambe currently pursuing BA. LLB from IILS Law College (Pune). This is an article which deals with the key elements of the shareholders' agreement.

What is an agreement?

A mutual understanding between two or more legally competent individuals or entities about their rights and duties regarding their past or future performances and consideration.

What is a shareholders’ agreement?

A shareholders' agreement is an arrangement between a company's shareholders that specifies how the company should operate and describes the rights and obligations of the shareholders. The agreement includes details of the company's management and rights and protection of shareholders.

What are the fundamentals of a shareholders' agreement?

The shareholders' agreement is intended to ensure that the shareholders are treated fairly and their rights are protected. This agreement contains sections outlining the fair and equitable price of the shares (especially when sold). It allows shareholders to make decisions about what external parties can do as future partners and provides protections for minority positions.

A date in a shareholders' agreement, often outlining the number of shares issued, a capitalization table, outlining the shareholders' and company's percentage of ownership, any restrictions on the exchange of shares, the current shareholders' prior rights to purchase the shares (if there is a new problem maintaining the percentage of their ownership), And details of payments in case of sale of a company.

Why is the shareholders' agreement important?

Its purpose is to protect the investment of the shareholders in the company, to establish a fair relationship between the shareholders and to manage how the company operates. Agreement: Establishing the rights and obligations of the shareholders; providing an element of security for minority shareholders and the company.

The shareholders' agreement is entered into to resolve any dispute between the shareholder and the company. While we can be sure that nothing will go wrong and nothing is known for sure, such agreements can help dissolve disputes and maintain a healthy relationship between shareholders and the company. It helps to protect the investment made by a shareholder and lays down the terms and conditions for shareholders and any other party associated with the company. It is necessary to regulate a partner’s contract because not every partner is the same.

An agreement should be made keeping in mind that each person is different and has a different opinion on the issues or matter involved. They may or may not agree with each other.

Key elements of the shareholders' agreement

Share subscription

Share subscription agreement is a promise made by a potential shareholder, also known as a subscriber, that the subscriber becomes a shareholder (shareholder) at a fixed price in exchange for financing and providing the company in the agreed number of “instalments” Allocating a certain number of shares. A stock subscription agreement should include the number of shares issued to the shareholder and the order and timing of the financial progress. Sometimes it seems that a stock subscription agreement sets the terms of a term sheet completely and accurately.

Sale of shares

The sale of shares can be problematic if there is a dispute between the two shareholders, but arranging for such events can be provided in the shareholder's agreement. This can be done with a number of different procedures, including tag, drag, round supply, lock or a combination of these. These types of arrangements are designed to provide a solution to a stakeholder's failure to come to an agreement on how to resolve it.

Company operations

The agreement can also cover the activity of the company, such as the right of a minority shareholder to nominate a director to the board of the company or the board of directors. While shareholders directly influence the company's operations by selecting senior management staff, they also influence the company's operations in other ways. For example, most investors tend to invest in stocks that can meet their earnings targets, thus holding businesses under constant pressure to reach their revenue and profit forecasts.


The incorporation of these clauses protects shareholders who own less than 50 % of the shares in the company by allowing them more insight into fundamental decisions. Such minority shareholders typically have very little say in the company's operations if they are outvoted by a majority, so veto rights in the Shareholders' Agreement are used to empower minority shareholders. One of the most important sections of a shareholders’ agreement is a vetoes section which lists out a series of transactions which cannot be carried out without the consent of the protected minority shareholder

50/50 shareholders and deadlock

A critical part of any agreement will also deal with a situation in which there are two shareholders with 50 per cent each and no agreement on the substantive course of action.

Non-compete covenants

It is normal to have a non-competition arrangement to prohibit shareholders from interfering with the company as long as they are shareholders. This will include rivalry with the company customers, the recruitment of the company's suppliers and the recruitment of company workers. Some of the most common provisions in the shareholder agreement are set out above.

Other Issues

  1. Privacy procedure,

  2. Arbitral trials,

  3. There is no alliance,

  4. Allocation of rights and

  5. Conflict with the terms of the Association of the Company

Five Important Clauses to Include in Your Shareholders' Agreement

  1. Share Vesting Clause.

  2. Pre-emptive Rights and Right Of First Refusal Clause.

  3. Special Rights to Appoint Directors and Super-Majority Clause.

  4. Non-competition Clause.

  5. Deadlock Resolution Clause.

Typically, a shareholder’s agreement should include clauses such as these:

  1. Who is a shareholder in the company

  2. Dilution rights

  3. Intellectual property assignment

  4. Shareholdings and classes of shares for each shareholder

  5. Compulsory transfer of shares in the event of a tragedy

  6. Voting powers

  7. Dividend policies (startups generally have no dividend policies)

  8. Responsibilities

  9. Reverse vesting provisions

  10. Preemptive rights


One must understand the need for a shareholder agreement, and why it is important to strike a balance between the interests of the shareholders and the interests of the company. Do not make the words vague, but keep them correct, which restricts the interpretation of the words. Broad interpretations are creating problems in the long run.

It is clear that the rights and obligations of both parties are specified. Some of the major benefits of a shareholder agreement can be summarized as follows:

  • When the parties enter into business, there is usually a lot of trust and goodwill between the shareholders at the outset. All parties are looking for a successful business, and often little attention is paid to what would happen if there were a difference of opinion.

  • Also, a lot of discussions! By having specific discussions on what to do with the shareholder agreement, it focuses on the minds of parties who may not have previously thought about addressing specific scenarios.

  • In contrast to the articles of association, the shareholder agreement is a private document that can be of benefit to the parties, especially if there are very sensitive commercial details that need to be included.

  • Without a shareholder agreement, in the event of a dispute or a breach of trust between the shareholders, there will be no agreement on how to resolve the dispute or on how to terminate the relationship between the shareholders (other than the statutory provisions and the terms set out in the articles of association).

  • Without a shareholder agreement, in the event of a dispute or a breach of trust between the shareholders, there will be no agreement on how to resolve the dispute or on how to terminate the relationship between the shareholders (other than the statutory provisions and the terms set out in the articles of association).

  • If all shareholders approach the problem fairly and reasonably, a solution may be documented and all parties may be able to move forward happily. However, when shareholders have dropped and are no longer on the talking terms, negotiations to agree with separation may prove stressful, time-consuming and costly.

  • The terms of the shareholder agreement and the articles of association of the company are very much tailored to the company's share and management structure and the company's future plans.

  • Agreements are not "one size fits all" and receiving advice that is appropriate to the circumstances of your company is imperative to avoid creating more problems than the agreements solve.

Examples of a shareholder agreement;




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