Shareholders agreement

CHENNAI
3rd Floor, ‘Creative Enclave’,

SHAREHOLDERS
148-150, Luz Church Road,
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

AGREEMENT
BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921

SUCHITRA BAI
EMAIL
PATENT DEPARTMENT
info@altacit.com
WEBSITE
www.altacit.com

INTRODUCTION
CHENNAI
A Shareholders’ Agreement is a contract
between shareholders of a private limited
Mylapore,
Chennai - 600 004.

company with the various provisions that will
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
govern each of the shareholders who are party to
Tel: +91 - 80 - 6546 2400 the agreement vis-à-vis the Company and the
COIMBATORE
BB1, Park Avenue,
shares held by each such shareholder and also
Tel: +91 - 422 – 6552921
the provisions that will govern the management
of the Company as agreed to by the parties to the
agreement. It may be noted that in case of a
public limited company, there may be
enforceability issues with certain provisions of the
EMAIL
info@altacit.com shareholders’ agreement.
WEBSITE
www.altacit.com

NEED FOR EXECUTING
SHAREHOLDERS
CHENNAI
3rd Floor, ‘Creative Enclave’, AGREEMENT
Shareholders’ agreements lay down clearly defined
rights and obligations between and of the parties,
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
i.e.:
BANGALORE
Suite 920, Level 9,
Raheja Towers, a. Appointment of Directors and quorum
requirements;
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
b. Determining the matters requiring special
Coimbatore - 641018. resolution or providing veto rights to certain
shareholders (more so in case of private equity and
Tel: +91 - 422 – 6552921

venture capital partners);
c. Financing the requirements of the company;
d. Restrictions on right to transfer shares freely;
EMAIL
info@altacit.com e. Defining the obligation of each of the shareholder
WEBSITE towards the company.
www.altacit.com

TYPES OF CLAUSES IN
SHAREHOLDERS’ AGREEMENTS
IN INDIA?
CHENNAI

• The shareholder’s agreements
provide for matters such as
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9, restrictions on transfer of shares,
forced transfers of shares, nomination
Raheja Towers,
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
of directors for representation on
boards, quorum requirements and
Tel: +91 - 422 – 6552921

veto or supermajority rights available
to certain shareholders at board level
or shareholder level.
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

MECHANISMS DOES THE LAW OF INDIA
PERMIT FOR REGULATING SHARE
TRANSFERS?
CHENNAI

a. Right of first refusal: This is an


agreement between the existing
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
shareholders whereby the shareholder
Raheja Towers,
26-27, M G Road, wishing to sell to a third party must first offer
the shares to the holder of the first refusal
Tel: +91 - 80 - 6546 2400

right. If the holders of the right of first refusal
COIMBATORE
BB1, Park Avenue,
Tel: +91 - 422 – 6552921 do not buy the shares, the shareholder can
normally sell freely to a third party.

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

CHENNAI

b. Right of first offer: This is a


variation of the right of first refusal in
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
Raheja Towers,
which a fixed price is agreed to from
the outset. The shareholder wishing to
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
sell shall first offer the shares to the
holder of the right of first offer holder at
Tel: +91 - 422 – 6552921

the fixed price. If the holder of the right
does not purchase the shares, the
shareholder wishing to sell is free to
EMAIL
info@altacit.com sell it to a third party.
WEBSITE
www.altacit.com

CHENNAI

c. Drag-along and Tag-along Rights:


Drag-along right is an agreement between
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
Raheja Towers,
the shareholder, where the shareholder
26-27, M G Road,
Tel: +91 - 80 - 6546 2400
wishing to sell his shares to a third party
COIMBATORE
BB1, Park Avenue,
has the right to drag all the other
shareholders and make complete exit
Tel: +91 - 422 – 6552921

from the company. Tag-along right is the
opposite - the other shareholders have a
right to tag along with the shareholder
EMAIL
info@altacit.com wishing to sell his shares to a third party.
WEBSITE
www.altacit.com

CHENNAI

d. Buy-back rights: These give


the company the right to redeem
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

the shares of a certain shareholder
BANGALORE
Suite 920, Level 9,
Raheja Towers,

in specific circumstances, such as
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
withdrawal or death of the
shareholder.
Tel: +91 - 422 – 6552921

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

CHENNAI

e. Call option: Call option gives


its holder the right to buy a
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

specified number of shares of the
BANGALORE
Suite 920, Level 9,
Raheja Towers,

underlying stock at a
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
predetermined price (strike price)
between the date of purchase and
Tel: +91 - 422 – 6552921

the options expiration date.

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

CHENNAI

f. Put Option: Put option gives its


holder the right to sell a specified
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

number of shares of the underlying
BANGALORE
Suite 920, Level 9,
Raheja Towers,

common stock at a predetermined
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
price (strike price) on or before the
expiration date of the contract.
Tel: +91 - 422 – 6552921

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

ARBITRATION CLAUSE IN A
SHAREHOLDERS’ AGREEMENT
CHENNAI

• The parties to the shareholders’
agreement are free to include an
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
arbitration clause with seat outside India
and/or under a law other that of India as
Raheja Towers,
26-27, M G Road,

long as one of the parties to the
Tel: +91 - 80 - 6546 2400

COIMBATORE

shareholders is a non-resident.
BB1, Park Avenue,
Tel: +91 - 422 – 6552921

However, the parties should specifically
include a clause excluding Part 1 of the
Indian Arbitration Act, 1996, in order to
EMAIL avoid the provisions of the Indian
Arbitration Act, 1996 being applicable to
info@altacit.com
WEBSITE
www.altacit.com

ARE MINORITY SHAREHOLDERS
PERMITTED TO PARTICIPATE
CHENNAI

• There are no specific provisions under
Indian law to ensure participation of
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
minorities on the board of directors of a
company. Also, Indian law does not
Raheja Towers,
26-27, M G Road,

provide for provisions ensuring minority
Tel: +91 - 80 - 6546 2400

COIMBATORE

control over board of directors.
BB1, Park Avenue,
Tel: +91 - 422 – 6552921

However, the minority shareholders can
be given the right to nominate directors
on the board of directors by contractual
EMAIL arrangement between the shareholders.
info@altacit.com
WEBSITE
www.altacit.com

TYPES OF
SHAREHOLDERS
AGREEMENTS to form a
CHENNAI
• Pre-incorporation/formation agreement an agreement
Mylapore, put in place between the parties who intend
company and to be its initial shareholders.
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9, • Subscription and shareholders agreement: a
shareholders agreement entered into between parties
Raheja Towers,
26-27, M G Road,
Tel: +91 - 80 - 6546 2400
who are subscribing for shares contemporaneously
COIMBATORE
BB1, Park Avenue, with the entry into the shareholders agreements.
Tel: +91 - 422 – 6552921
• Shareholders agreement governing a 50:50
shareholding position.
• Shareholders agreement governing a majority/minority
situation.
• Shareholders agreement governing a joint venture
EMAIL situation.
info@altacit.com
WEBSITE
www.altacit.com

ADVANTAGES -
SHAREHOLDERS AGREEMENT
CHENNAI
• Privacy: The predominant reason for using a
Shareholders agreement is that it is a private
Mylapore,
Chennai - 600 004.

document between parties thereto which can
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
be made subject to express confidentiality
Tel: +91 - 80 - 6546 2400 restrictions. By contrast the Articles of
COIMBATORE
BB1, Park Avenue,
Associate are a public document available for
Tel: +91 - 422 – 6552921
inspection by members of the public in the
Companies Registration Office. This makes the
Articles of Association an unsuitable means for
dealing with matters such as, for eg., the
remuneration of directors or other sensitive
EMAIL
info@altacit.com internal management matters.
WEBSITE
www.altacit.com

CHENNAI

• Greater Binding Effect: As explained
above articles of Association can only
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
bind a shareholder in his capacity as
Shareholder. By contrast shareholders’
Raheja Towers,
26-27, M G Road,

agreements may be used to give rights
Tel: +91 - 80 - 6546 2400

COIMBATORE

and impose obligations on shareholders.
BB1, Park Avenue,
Tel: +91 - 422 – 6552921

Eg., binding a person in his capacity as
director or as a creditor or agent.
However one needs to be very careful in
EMAIL imposing obligations on a party in his
capacity as a Director.
info@altacit.com
WEBSITE
www.altacit.com

CHENNAI

• Variation: As explained above Articles
of Association can be amended by
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9, way of a special resolution. By
contrast, unless a shareholders
Raheja Towers,
26-27, M G Road,
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
agreement expressly provides for a
specific variation mechanism it can
Tel: +91 - 422 – 6552921

only be varied by unanimous
agreement of the parties thereto.

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

DISADVANTAGES
CHENNAI
• Binding Effect: Because of its nature as a contact a
shareholders agreement only binds the parties
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
thereto and does not automatically bind all
shareholder. Therefore if a party transfers his
BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
Bangalore - 560 001. shares the transferee will not automatically be
bound by the terms of the shareholders
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road, agreement. To circumvent this it is normal to
provide in a shareholders agreement that an
Tel: +91 - 422 – 6552921

existing shareholder who is party to a shareholders
agreement can only transfer his shares if he
procures that the transferee enters into what is
known as a deed of adherence which joins the
EMAIL
info@altacit.com transferee as a party to the shareholders
WEBSITE agreement.
www.altacit.com

CHENNAI
• Interpretation: Again as shareholders agreements
are contracts they are subject to the ordinary rules of
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
contract law, in the event a dispute arising as to the
BANGALORE
Suite 920, Level 9, meaning of a provision in the shareholders
agreement a court would, as a primary means of
Raheja Towers,
26-27, M G Road,
Tel: +91 - 80 - 6546 2400
interpretation, seek to establish what was the intent
COIMBATORE
BB1, Park Avenue, of the parties based on the wording of the contract.
By contrast the language in articles of association
Tel: +91 - 422 – 6552921

has become in many respects fairly standardized
and many of the provisions used in articles of
association have been judicially considered over the
years and there may therefore be available judicial
EMAIL
precedent to assist in the interpretation of those
info@altacit.com provisions.
WEBSITE
www.altacit.com

WHEN A SHAREHOLDER BE
COMPELLED TO TRANSFER HIS
CHENNAI
SHARES
• Where an individual shareholder becomes
bankrupt.
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
• Where a corporate shareholder becomes
insolvent or has a receiver or an examiner
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
Tel: +91 - 80 - 6546 2400 appointed.
COIMBATORE
BB1, Park Avenue, • Where a corporate shareholder transfers shares
to another member of its group and that
Tel: +91 - 422 – 6552921

transferee ceases to be member of the group.
• Sometimes but less frequently, where an
individual shareholder dies.
EMAIL
• Where an individual shareholder is an employee
info@altacit.com of the company and he ceases to be employed
WEBSITE
www.altacit.com by that company.

CHENNAI

Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821

BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,

THANK YOU
Tel: +91 - 80 - 6546 2400

COIMBATORE
BB1, Park Avenue,
Tel: +91 - 422 – 6552921

EMAIL
info@altacit.com
WEBSITE
www.altacit.com

Shareholders agreement

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