Shareholders Agreement

Shareholder's Agreement is an arrangement between the shareholders of the company, with the purpose being to assure the shareholders' investment in the company, to maintain an honest relationship between the stakeholders, and to govern the proper functioning of the company. Key areas of the Shareholders' Agreement are:

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  1. Rights and liabilities of the shareholders.
  2. Regulating the sale of shares in the company.
  3. Rights and liabilities in the functioning of the company.
  4. Protecting the rights of minority shareholders.


The 'Shareholder Agreement' is carried out between the shareholders, investors, and the company. Once the shareholders come together, the purpose behind the 'Shareholder Agreement' is defined. Mainly, the shareholders come together to carry out the business activity and get described under the Shareholders' Agreement.


'Shareholders Agreement' is not mandatory and is binding only upon the parties signing the agreement. It is legal compliance only for the parties. The agreement is not enforceable on the third party, but if the bye-laws of the company state about the enforceability of shareholders' agreement against the third party in the cases of management of the company, then the third party has to comply with it. The tenure of the agreement is up to the discretion of the parties.

It can be concluded that the Shareholders' Agreement is a contractual obligation between the shareholders of the company which aims at governing the management of the company as well as establishes a relationship between the stakeholders of the company. It lays down the rights and obligations of the shareholders. It aims at creating a balance between the shareholders’ interests and the company’s interests.

How to apply?

Transfer of Shares

The Shareholders' Agreement plays an important role in the transfer of shares of a private company because the shares are easily transferable in public companies. Therefore, the transfer of shares is operated by the shareholders of the company by the bye-laws of the company. The common mechanisms are:

  1. Right of first refusal – Shareholders are bound to offer the shares to the existing shareholders instead of any third party.
  2. Right of the first offer- The shareholder shall offer to sell the shares to the existing shareholders at a fixed price. If he refuses, then the shareholder can offer it to a third party.
  3. Buy-back rights – The shares of certain shareholders can be reclaimed by the company, under certain circumstances.
  4. Call option- In this, the shareholders have the right to buy the shares at a predetermined price.
  5. Put option – In this, the shareholders have the right to sell the shares at a predetermined price.
  6. Drag- along and Tag-along right- If the shareholder sells his shares to a third party, then all the shareholders will sell their shares to the same party and will be tagged along.

Shareholders' Agreement is specific and flexible. After signing the agreement, most of the companies amend their by-laws to gain benefits from the agreement. It grants rights to the parties of agreement and ensures that shareholders may get benefits for investing in the company.

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