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Shareholders Agreement
The agreement between the people who own the company, deciding who runs it, who can sell, and what happens when they disagree. The articles will not answer any of those.
- Board composition, voting and reserved matters written in
- Share transfer restrictions, so shares cannot leave the group unnoticed
- A deadlock route, for the day two equal founders disagree
- Drafted by experienced lawyers for how your shareholders actually operate
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What a shareholders agreement is
The contract between a company’s shareholders about management, control, and what each of them may and may not do.
A shareholders agreement is an agreement between the shareholders of a company in which they decide the management, the structure, the directors, the shareholding and the control of the company, together with their own rights and obligations. It regulates shareholders’ rights, the management of the company and its operating policy.
It is between the shareholders. The company itself is usually made a party as well, so that obligations placed on the company are binding on it, but the agreement is executed by each shareholder who is a party to it, not signed on their behalf by a director.
Its job is to answer the questions the articles of association leave open. Who sits on the board, what decisions need more than a simple majority, whether a shareholder may sell to an outsider, what happens when two equal founders will not agree: none of those are settled by the Companies Act or by a standard set of articles.
- Between
- The shareholders
- Company as a party
- Usually
- So obligations on it bind it
- Signed by
- Every shareholder party
- Not by a director for them
- Executed on
- Stamp paper
- At the rate set by the state
- Preceded by
- The term sheet
- Where the terms were negotiated
- Filed with the MCA
- No
- Overrides the articles
- No
- Conflicting clauses need an amendment
Why founders have us draft it
- Experienced lawyers who draft these for founders and investors
- A consultation about how decisions are actually taken in your company
- Reserved matters, transfer restrictions and deadlock drafted deliberately
- Checked against your articles, so the two do not contradict each other
- Thousands of businesses served across every state in India
What the drafting covers
- A consultation call about the shareholding and how decisions get taken
- An agreement drafted from scratch by an experienced lawyer
- Board composition, voting rights and the matters that need a special majority
- Share transfer restrictions, pre-emption rights and exit provisions
- A deadlock mechanism, where the shareholding makes one necessary
- Revisions after you and the other shareholders have read the draft
Where an investment is in progress, the term sheet comes first and this agreement is drafted from it. Tell us on the call which stage you are at.
The clauses founders regret leaving out
Reserved matters
The decisions that cannot be taken on a simple majority: new shares, borrowing, selling the business. Without a list, a majority holder can do all three alone.
Transfer restrictions
Pre-emption, tag-along and drag-along rights. They are what stops a co-founder selling to a stranger, and what stops a minority blocking a sale of the whole company.
What happens on a deadlock
Two shareholders at fifty each is the commonest structure and the one with no tiebreak. Agree the route out before you need it.
Leaver provisions
What happens to a founder’s shares if they leave. Vesting, and a price for the shares of someone who goes early, are far easier to agree on day one.
Term sheet or shareholders agreement
They are two stages of one deal. Almost every point in this agreement was decided in the term sheet, which is why a founder who plans to "sort it out later" has the sequence backwards.
| Attribute | Shareholders agreement | Term sheet |
|---|---|---|
| Where each one sits | ||
| At completionOnce the terms are settled and the diligence is done. It is commonly combined with the share subscription agreement into a single SSHA. | FirstBefore the diligence and the long-form documents, while the parties are still deciding whether there is a deal to do. | |
| YesA valid and legally binding agreement governing the investment and the running of the company after it. | NoNot legally binding on any of its parties, which is the point of it: both sides can put their position without committing to it. Confidentiality and exclusivity clauses inside it are usually the exceptions and are drafted to bind. | |
| It governsIt stays in force for as long as the shareholders hold their shares, and it is what a dispute between them is decided against. | It dissolvesOnce the binding agreement comes into effect, the term sheet automatically falls away. Anything in it that was not carried across is gone. | |
| What it decides | ||
| All the shareholdersIncluding founders who are not taking new money. It regulates their rights between themselves as much as against the incoming investor. | Founders and investorIt should identify precisely who the promoters, founders and directors are, and who the investor is. Vagueness here is what makes the later documents slow. | |
| How the company runsManagement and control, the directors, the shareholding, and the rights and obligations of each shareholder: the term sheet’s commercial points turned into enforceable machinery. | The commercial shapeValuation, investment amount, shareholding structure, anti-dilution, liquidation preference, board composition, share transfer restrictions and exit options. | |
| On the draftingBy this stage the commercial terms are settled. What is still open is whether the drafting actually delivers what the term sheet said it would. | HereThis is where a point is cheap to argue. Everything agreed here is what the lawyers then draft, and reopening it at the long-form stage costs time, fees and goodwill. | |
| Next step | Get started | Know more |
Swipe the table sideways, Shareholders agreement stays in view. Open any attribute to read the detail behind both answers.
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Who signs a shareholders agreement?
Every shareholder who is a party to it, in their own name. The company is normally a party as well, signed for by an authorised director, so that the obligations placed on the company bind it.
A shareholder who does not sign is not bound by it, which is why an agreement that misses one of them out is worth less than it looks.
Does it override the articles of association?
No. Where a clause conflicts with the articles, the articles generally prevail, so an agreement that needs one has to be paired with an amendment to them.
That check is part of the drafting here, and it is the commonest defect in an agreement drafted without seeing the articles.
Does it need stamp paper, and does it have to be filed?
It is executed on stamp paper, at the rate set by the state where it is executed. It is not filed with the MCA and it is not a public document.
Do we need one if there are only two of us?
Two equal shareholders is the structure that needs one most. There is no tiebreak, no majority and no default mechanism in law for a disagreement, so whatever the two of you have not written down is unresolvable.
Is a shareholders agreement the same as an SSHA?
An SSHA is a share subscription and shareholders agreement, meaning the subscription for the new shares and the shareholders arrangements combined into one document, which is how an investment round is usually papered.
The shareholders half is the same document described here.
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