Shareholders Agreement in India: Key Clauses for Startups and Family Companies

ByBase Legal

The problem

Co-founders or family members start a company on trust. Later they disagree about money, control or someone leaving. There is nothing in writing about what happens next.

Example: Three friends start a private company in Bengaluru with equal shares. After two years, one stops working but keeps his shares and blocks decisions.

What the law says

A shareholders agreement (SHA) is a contract between the shareholders, and often the company. A private company is also governed by its Articles of Association under the Companies Act, 2013.

In V.B. Rangaraj v. V.B. Gopalakrishnan (1992), the Supreme Court held that a restriction on share transfer not found in the Articles does not bind the company. So important SHA terms should also be written into the Articles.

Key clauses

  1. Shareholding and future funding. Who holds what, and how new shares are issued.
  2. Board seats and who can appoint directors.
  3. Reserved matters. Decisions that need everyone’s or a majority’s consent.
  4. Transfer limits. Right of first refusal, tag-along and drag-along rights.
  5. Founder vesting. Shares earned over time, so a founder who leaves early does not keep everything.
  6. Deadlock and exit. What happens if shareholders cannot agree, and how someone can exit.
  7. Confidentiality, non-solicit and dispute resolution. A post-exit non-compete is generally not enforceable under Section 27 of the Indian Contract Act, 1872, so draft this part carefully.

What you can do – step by step

  1. List what each person brings and expects.
  2. Agree the key terms in a short term sheet.
  3. Get the SHA drafted and the Articles amended to match.
  4. Pay the stamp duty that applies in Karnataka and keep signed originals.

Mistakes to avoid

  • Using a downloaded template without changes.
  • Not amending the Articles.
  • Leaving out a deadlock or exit clause.

Contact

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This article is for general information only. It is not legal advice. Please speak to an advocate about your own case.