Shareholders' agreement explainer: every clause in plain English (2026)

A shareholders' agreement (SHA) is the contract between a company and its shareholders that sets out how the company will be governed and how its shares can be held and transferred. In a startup funding round it is signed at the same time as the share subscription agreement and comes into force at closing. It covers the board, the decisions that need the investor's consent, information rights, restrictions on selling shares, the investor's exit rights, the liquidation preference, founder vesting and non-compete, warranties and indemnities, and dispute resolution. It lasts until an IPO or until the investor sells out.

The articles of association are the company's constitution, filed with the Registrar of Companies, public, and binding on the company and every shareholder present and future. The shareholders' agreement is a private contract binding only on the people who sign it. Because Indian law enforces transfer restrictions and governance rights against the company only when they are in the articles, every shareholders' agreement requires the company to adopt restated articles that mirror it. Where the two conflict, the SHA says it prevails between the parties and the articles must be amended.

Yes, between the parties who sign it, as a contract under the Indian Contract Act 1872, and the proviso to Section 58(2) of the Companies Act 2013 expressly makes a contract between persons about the transfer of securities enforceable. It does not bind the company or a transferee who is not a party unless its terms are in the articles: the Supreme Court held in V.B. Rangaraj v V.B. Gopalakrishnan (1992) that a transfer restriction not in the articles could not be enforced against the company, and the Delhi High Court applied the same rule in World Phone India v WPI Group (2013). That is why the articles are restated and new shareholders sign deeds of adherence.

Reserved matters, also called affirmative vote rights, veto rights or protective provisions, are the decisions the company cannot take without the investor's prior written consent, whatever the board or the shareholders vote. A Series A list typically has 15 to 25 items: amending the articles, issuing shares, borrowing above a threshold, related party transactions, acquisitions and disposals above a threshold, the annual budget, a change of business, dividends, appointing or paying the CEO and founders, changing auditors, ESOP changes, large litigation and winding up. Founders should negotiate the thresholds, a deemed-consent timeline and a fall-away when the investor's stake drops below a set percentage.

It depends on the vesting and leaver clauses. Typically 30% to 50% of a founder's shares are treated as vested at the Series A and the rest vest monthly over 24 to 48 months. A founder who leaves gives up unvested shares, usually at face value. A good leaver (anyone who is not a bad leaver) keeps vested shares. A bad leaver (voluntary resignation within a stated period, or termination for Cause such as fraud or wilful misconduct) can also lose vested shares at face value or a discount to fair value. The shares are taken back by a buy-back under Section 68 or a transfer to the other founders or the investor. The definitions of Cause and Good Reason decide which category a departing founder falls in.

A drag-along lets a majority or a specified investor force the other shareholders to sell their shares to a buyer on the same terms, so that a buyer can acquire 100% of the company. In Indian Series A agreements the drag usually becomes exercisable after four to six years if no exit has occurred, requires a bona fide third-party offer at or above a price floor (often two to three times the last round's price), needs approval by the investor majority and the board, applies the liquidation preference to the proceeds, and limits the dragged holders' warranties to title and capacity with liability capped at their proceeds. The clause is enforced through the articles, a voting covenant and a power of attorney to sign transfer forms for a holder who refuses.

A deed of adherence is a short document by which a person who acquires shares after the shareholders' agreement is signed agrees to be bound by it as if they were an original party. The SHA makes signing it a condition of registering any transfer or allotment, and the articles give the board the power to refuse registration until it is signed. Buyers in a secondary sale, new investors in a small follow-on, family trusts receiving founder shares and employees exercising options all sign one, with employees usually signing a limited form that gives them no rights beyond their shares.

Many Indian shareholders' agreements give the investor a right, after four to six years without an exit, to require the company to buy back its shares at fair market value to the extent Section 68 of the Companies Act allows (25% of paid-up capital and free reserves in a year, from free reserves or securities premium) and, if the company cannot, to require the promoters to buy the shares (a promoter put). For a foreign investor the FEMA Non-debt Instruments Rules limit any such exit to fair value with no assured return. A promoter put makes the founders personally liable for the investor's exit and is the clause most worth resisting: ask for a best-endeavours obligation to find a buyer instead, or a cap and instalments.

The special rights end. SEBI's listing framework treats rights such as a board nomination right, vetoes and information rights as inconsistent with a listed company, so the SHA provides that they fall away on listing and that the preference shares convert into equity shares before the offer. Regulation 31B of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 allows a special right to continue only if public shareholders approve it by special resolution and renew that approval every five years, so the SHA records the company's obligation to put such a resolution to the vote if the investor asks. The founders are classified as promoters in the offer document and accept the promoter lock-in; the investor normally is not.

During the founder's employment and while they hold shares, yes. After they leave, usually not: Section 27 of the Indian Contract Act 1872 makes an agreement in restraint of trade void, and Indian courts have refused to enforce post-employment non-competes however reasonable. Courts have upheld restraints connected with the sale of goodwill or a continuing shareholding, which is why shareholders' agreements tie the non-compete to the shareholding and the investor's purchase, but the 12 to 24 month tail after exit remains doubtful. Non-solicitation and confidentiality clauses are more readily enforced. A founder should not plan around unenforceability: the investor can still seek an injunction and treat a breach as a bad-leaver event.

A founders' agreement is a short shareholders' agreement between co-founders, signed before any investor, that records the equity split and the reasons for it, roles and titles, vesting with a cliff, the decisions that need both founders, time commitment and salary rules, IP assignment, transfer restrictions, good and bad leaver terms and dispute resolution. Most Indian startups skip it and regret it when a co-founder leaves with a large unvested stake. Investors ask for it in diligence. It is replaced by the investor SHA at the first institutional round, and its vesting carries over with credit for time served.

By a written amendment signed by the parties the SHA specifies, usually the company, the founders and the Investor Majority, which then binds all parties including small investors who did not sign, subject to a protection for minority investors against amendments that single them out. In practice the SHA is amended and restated in full at each funding round, with the new investors signing and the old agreement terminated. Any amendment that changes the articles also requires a special resolution under Section 14 and a Form MGT-14 filing within 30 days.