A shareholders agreement is the document you never look at until the relationship goes wrong, at which point it decides everything. The clauses below are the ones that actually get litigated.
Control
- Board composition: how many directors each shareholder or class may nominate, quorum, and what happens if a nominee is absent.
- Reserved matters: the list of decisions that cannot be taken without the consent of specified shareholders. Issuing shares, borrowing above a threshold, related party transactions, changing the business, selling material assets.
- Information rights: what accounts and management information each shareholder gets, and how often.
Getting shares in and out
- Transfer restrictions and pre-emption: existing shareholders get first refusal before shares go to an outsider.
- Tag along: if the majority sells, a minority shareholder can require the buyer to take their shares on the same terms. This is the minority's main protection.
- Drag along: if a defined majority accepts an offer for the whole company, they can compel the rest to sell. This is what makes the company saleable.
- Valuation mechanism: who values the shares, on what basis, and whether the valuer's decision is final. Leaving this vague guarantees a dispute.
When it breaks down
- Deadlock resolution: escalation to founders, then a casting vote, then a buy-sell mechanism such as Russian roulette or a shoot-out.
- Default and exit: what counts as a material breach, and what the defaulting shareholder loses.
- Dispute resolution: a clean arbitration clause with seat, venue, number of arbitrators and governing law.
The mistake that voids half the agreement
A shareholders agreement binds the parties who sign it. It does not automatically bind the company or override the articles. Under the Companies Act, 2013 the articles of association are the company's constitution, and courts have refused to enforce SHA restrictions on share transfer that were never incorporated into the articles. Amend the articles to mirror the agreement. This single step is skipped more often than any other.
A shareholders agreement binds the parties who sign it. It does not automatically bind the company or override the articles. Under the Companies Act, 2013 the articles of association are the company's constitution, and courts have refused to enforce SHA restrictions on share transfer that were never incorporated into the articles. Amend the articles to mirror the agreement. This single step is skipped more often than any other.
For a private company
Restrictions on transfer are permissible and indeed expected, since a private company must by definition restrict the right to transfer its shares. That gives more freedom than a public company has.