The document discusses key aspects of shareholders' agreements in India such as: 1) Shareholders' agreements govern the relationship between shareholders and management control of a company. 2) They define the rights and obligations of shareholders regarding matters like director appointments, veto powers, and share transfers. 3) Common clauses in Indian shareholders' agreements restrict share transfers, provide veto rights to some shareholders, and determine board representation.

1. 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

2. INTRODUCTION
CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
A Shareholders’ Agreement is a contract between
Mylapore,
Chennai - 600 004. shareholders of a private limited company with
the various provisions that will govern each of the
Tel: +91 - 44 - 2498 4821
BANGALORE
Suite 920, Level 9,
Raheja Towers,
26-27, M G Road,
shareholders who are party to the agreement vis-
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400 à-vis the Company and the shares held by each
COIMBATORE
BB1, Park Avenue,
such shareholder and also the provisions that will
govern the management of the Company as
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
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 shareholders’
EMAIL
info@altacit.com agreement.
WEBSITE
www.altacit.com

3. NEED FOR EXECUTING
SHAREHOLDERS AGREEMENT
CHENNAI
3rd Floor, ‘Creative Enclave’,
Shareholders’ agreements lay down clearly defined
rights and obligations between and of the parties,
148-150, Luz Church Road,
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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
b. Determining the matters requiring special
# 48, Race Course Road,
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
WEBSITE shareholder towards the company.
www.altacit.com

4. TYPES OF CLAUSES IN
SHAREHOLDERS’ AGREEMENTS IN
INDIA?
CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
• The shareholder’s agreements provide
for matters such as restrictions on
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
BANGALORE
Suite 920, Level 9,
Raheja Towers,
transfer of shares, forced transfers of
26-27, M G Road,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
shares, nomination of directors for
COIMBATORE
BB1, Park Avenue,
representation on boards, quorum
requirements and veto or
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
supermajority rights available to
certain shareholders at board level or
shareholder level.
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

5. MECHANISMS DOES THE LAW OF INDIA
PERMIT FOR REGULATING SHARE
TRANSFERS?
CHENNAI
a. Right of first refusal:
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road, 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
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
offer the shares to the holder of the first
refusal right. If the holders of the right of
COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921 first refusal do not buy the shares, the
shareholder can normally sell freely to a
third party.
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

6. CHENNAI
b. Right of first offer: This is a
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
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,
Bangalore - 560 001.
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
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
at 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

7. CHENNAI
c. Drag-along and Tag-along Rights: Drag-
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
along right is an agreement between the
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
BANGALORE
Suite 920, Level 9,
Raheja Towers,
shareholder, where the shareholder
26-27, M G Road,
Bangalore - 560 001.
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 from
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
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

8. CHENNAI
d. Buy-back rights: These give
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road,
withdrawal or death of the
shareholder.
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

9. CHENNAI
e. Call option: Call option gives
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road,
predetermined price (strike price)
between the date of purchase and
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
the options expiration date.
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

10. CHENNAI
f. Put Option: Put option gives its
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
# 48, Race Course Road,
price (strike price) on or before the
expiration date of the contract.
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

11. ARBITRATION CLAUSE IN A
SHAREHOLDERS’ AGREEMENT
CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
• 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
Raheja Towers,
26-27, M G Road,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
as long as one of the parties to the
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
shareholders is a non-resident. However,
the parties should specifically include a
clause excluding Part 1 of the Indian
Arbitration Act, 1996, in order to avoid
EMAIL the provisions of the Indian Arbitration
Act, 1996 being applicable to it.
info@altacit.com
WEBSITE
www.altacit.com

12. ARE MINORITY SHAREHOLDERS
PERMITTED TO PARTICIPATE
CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
• 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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
provide for provisions ensuring minority
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
control over board of directors.
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

13. TYPES OF SHAREHOLDERS
AGREEMENTS
CHENNAI
3rd Floor, ‘Creative Enclave’,
• Pre-incorporation/formation agreement an agreement
148-150, Luz Church Road,
Mylapore, put in place between the parties who intend to form a
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821 company and to be its initial shareholders.
BANGALORE
Suite 920, Level 9, • Subscription and shareholders agreement: a
shareholders agreement entered into between parties
Raheja Towers,
26-27, M G Road,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
who are subscribing for shares contemporaneously
COIMBATORE
BB1, Park Avenue, with the entry into the shareholders agreements.
# 48, Race Course Road,
Coimbatore - 641018.
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

14. ADVANTAGES - SHAREHOLDERS
AGREEMENT
CHENNAI
3rd Floor, ‘Creative Enclave’,
• Privacy: The predominant reason for using a
148-150, Luz Church Road,
Mylapore,
Chennai - 600 004. Shareholders agreement is that it is a private
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
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400 restrictions. By contrast the Articles of
COIMBATORE
BB1, Park Avenue,
Associate are a public document available for
inspection by members of the public in the
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
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

15. CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
• 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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
COIMBATORE
BB1, Park Avenue,
agreements may be used to give rights
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
and impose obligations on shareholders.
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

16. CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
• 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,
Raheja Towers,
way of a special resolution. By
26-27, M G Road,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400
contrast, unless a shareholders
COIMBATORE
BB1, Park Avenue,
agreement expressly provides for a
specific variation mechanism it can
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
only be varied by unanimous
agreement of the parties thereto.
EMAIL
info@altacit.com
WEBSITE
www.altacit.com

17. DISADVANTAGES
CHENNAI
3rd Floor, ‘Creative Enclave’,
• Binding Effect: Because of its nature as a contact a
shareholders agreement only binds the parties
148-150, Luz Church Road,
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
Coimbatore - 641018.
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

18. CHENNAI
3rd Floor, ‘Creative Enclave’,
• Interpretation: Again as shareholders agreements
are contracts they are subject to the ordinary rules
148-150, Luz Church Road,
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
of contract law, in the event a dispute arising as to
BANGALORE
Suite 920, Level 9, the meaning of a provision in the shareholders
agreement a court would, as a primary means of
Raheja Towers,
26-27, M G Road,
Bangalore - 560 001.
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.
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
By contrast the language in articles of association
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 precedent
EMAIL
to assist in the interpretation of those provisions.
info@altacit.com
WEBSITE
www.altacit.com

19. WHEN A SHAREHOLDER BE COMPELLED
TO TRANSFER HIS SHARES
CHENNAI
3rd Floor, ‘Creative Enclave’,
• Where an individual shareholder becomes
148-150, Luz Church Road,
Mylapore,
Chennai - 600 004.
bankrupt.
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,
Bangalore - 560 001.
Tel: +91 - 80 - 6546 2400 appointed.
COIMBATORE
BB1, Park Avenue, • Where a corporate shareholder transfers shares
# 48, Race Course Road,
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
to another member of its group and that
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 by
WEBSITE
www.altacit.com that company.

20. CHENNAI
3rd Floor, ‘Creative Enclave’,
148-150, Luz Church Road,
Mylapore,
Chennai - 600 004.
Tel: +91 - 44 - 2498 4821
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,
THANK YOU
Coimbatore - 641018.
Tel: +91 - 422 – 6552921
EMAIL
info@altacit.com
WEBSITE
www.altacit.com