Drafting, review, and negotiation of shareholders' agreements for founders, investors, and closely held companies in India — structured under the Companies Act, 2013 and aligned with the company's articles of association.
Quick Summary
A shareholders' agreement is a private contract among the owners of a company that sets out how the company is run, how major decisions are made, what happens when an owner wants to leave or sell, and how disputes are resolved — the matters a company's standard constitution leaves unsaid. It is a contract under the Indian Contract Act, 1872 and operates alongside the company's articles of association under the Companies Act, 2013. Its value shows at the moments owners rarely plan for: a co-founder exiting, an investor coming in, a deadlock on a critical decision, or the sale of the business.
The agreement binds the shareholders who sign it as a matter of contract. But where a term concerns the company itself — most often a restriction on transferring shares — it should also be written into the articles of association, or it may not bind the company. Luke & Luka drafts shareholders' agreements from scratch, reviews and pressure-tests the draft an incoming investor has put in front of founders, and acts for one side in a negotiation — in each case aligning the agreement with the articles and the Companies Act so the two documents work together rather than against each other.
Key references: Ministry of Corporate Affairs · Companies Act, 2013 (India Code) · National Company Law Tribunal · Last reviewed: June 2026
Every company registered in India already has a constitution — the memorandum and articles of association filed with the Registrar of Companies. The articles set the default rules: how shares are issued, how directors are appointed, how meetings are run. What they do not capture is the private understanding between the people who actually own the business.
A shareholders' agreement fills that gap. It is a contract among some or all of a company's shareholders that records how they have agreed to run the company between themselves — the commercial bargain behind the share certificates. It answers the questions the articles leave open: who gets to decide the big things, what happens if a founder wants out, whether a shareholder can sell to an outsider and on what terms, and what happens if the owners cannot agree.
The two documents serve different purposes. The articles are public — anyone can inspect them at the ROC — and they bind the company and every member. A shareholders' agreement is private — it need not be filed, and it binds only the people who sign it. Drafted well, the two are aligned: the commercial terms sit in the agreement, and anything that must bind the company is mirrored in the articles.
A shareholders' agreement is worth putting in place wherever ownership is shared and the stakes are real:
The common thread is timing. The agreement earns its keep at the trigger moments — a departure, an investment, a deadlock, a sale — and those are precisely the moments when it is too late to start drafting. The right time to put one in place is before it is needed.
No two agreements are identical — the terms follow the deal. But most shareholders' agreements address the same core areas, and it is worth understanding what each one does in plain terms.
Day-to-day decisions sit with the board and management. But certain decisions are significant enough that the owners want a direct say — issuing new shares, taking on large debt, changing the nature of the business, selling major assets, or winding up. These are listed as reserved matters (sometimes called affirmative-vote items): decisions that cannot be taken without the consent of specified shareholders, typically including any investor. It is the mechanism by which a minority owner protects against being overridden on the things that matter most.
The agreement records who can appoint directors and how many — for example, a founder majority on the board with one seat reserved for an investor. It may also cover the chairperson, the casting vote, and quorum, so that control of the board reflects the agreed bargain rather than shifting from meeting to meeting.
Owners of a private company rarely want shares sold freely to outsiders, and transfer restrictions control this. A right of first refusal requires a selling shareholder to offer their shares to the others first, on the same terms an outsider has offered; a right of first offer requires them to offer internally before going to the market at all. Lock-in periods prevent founders from selling for an agreed time. This is the one area courts have treated strictly: a restriction in the agreement that is not also written into the articles may not bind the company — so this is where alignment between the two documents matters most.
These two clauses deal with what happens when a large shareholder sells. A tag-along (or co-sale) right lets a minority shareholder join the sale on the same terms — so a founder cannot sell out and leave the minority stranded with a new, unknown majority owner. A drag-along right works the other way: it lets a majority compel the minority to sell into a genuine exit, so a small holdout cannot block a sale of the whole company. Together they balance the interests of large and small owners at the point of exit.
When a company issues new shares, existing owners' percentages shrink. Pre-emptive rights let existing shareholders buy a portion of any new issue first, to maintain their proportion. Anti-dilution protection goes further for investors: if shares are later issued at a lower price than they paid — a "down round" — their holding is adjusted to compensate, through a "broad-based weighted average" (the common, balanced method) or, more aggressively, a "full ratchet".
The agreement sets out the routes by which owners eventually realise value — a sale of the company, a public listing, or a buy-back — and how shares are valued when one owner buys out another. Investors often have specific exit timelines and a liquidation preference that determines who is paid first if the company is sold or wound up.
Where ownership is evenly split, the parties can reach a genuine deadlock on a decision neither can carry. The agreement provides a way out — a casting vote, referral to mediation or a senior nominee, or a structured buy-sell mechanism (such as put-and-call options) under which one owner ends up buying the other out at a fair price. Without such a clause, a deadlock can paralyse the company.
Most agreements bind the shareholders to keep the company's affairs confidential, restrain founders from competing with the business for an agreed period, and specify how disputes under the agreement are resolved — usually by arbitration, which keeps the matter private and is generally faster than court.
This is the point most agreements get wrong, and it is worth stating plainly. A shareholders' agreement is a contract: it binds the people who sign it, and they can be held to it. But a company is governed by its articles of association, and where the agreement and the articles conflict on a matter concerning the company, the articles generally prevail — and a term sitting only in the agreement may not be enforceable against the company at all.
Indian courts have applied this most firmly to share-transfer restrictions: a restriction agreed between shareholders but absent from the articles has been held not to bind the company. The practical consequence is simple. Anything in the agreement that must operate at the level of the company — transfer restrictions, board nomination rights, reserved matters — should be mirrored in the articles, so the two documents reinforce each other. And nothing in either document can override the Companies Act, 2013 itself; an agreement cannot contract out of the statute.
The cost of having no agreement — or a weak one — is rarely visible until a trigger moment arrives:
Each of these is foreseeable, and each is addressable in advance. A shareholders' agreement is, in essence, a set of decisions taken calmly at the start so they do not have to be litigated bitterly later.
The firm works on shareholders' agreements in three situations, and the approach differs in each:
In each case the work is the same in spirit: to convert a commercial understanding into a document that is clear today and holds when it is tested. Subject to the applicable law and the specific facts, the agreement is drafted to align with the company's articles and to reflect the parties' actual intentions — not a template.
Yes. A shareholders' agreement is a contract under the Indian Contract Act, 1872, and it binds the shareholders who sign it, provided it meets the ordinary requirements of a valid contract — lawful consideration, free consent, and a lawful object. The parties can be held to its terms and can enforce it against one another. The one qualification is that terms concerning the company itself — particularly restrictions on transferring shares — should also be reflected in the company's articles of association to be fully effective against the company.
The articles of association are the company's public constitution, filed with the Registrar of Companies and binding on the company and every member. A shareholders' agreement is a private contract among some or all of the shareholders that records their commercial understanding — board rights, reserved matters, transfer restrictions, exit terms — and binds only those who sign it. The articles say how the company is governed by default; the agreement records the bargain the owners have actually struck. Where the two touch the same subject, they should be drafted to align.
Usually, yes. A founders' agreement is an early-stage document among the founders, often covering roles, equity split, vesting, and intellectual property. A shareholders' agreement is the broader instrument that governs all shareholders — including investors — and the company's wider governance. When outside investment comes in, the investor will generally require a full shareholders' agreement, which absorbs and supersedes much of the founders' agreement. The two can coexist, but the shareholders' agreement is the one that controls once the ownership widens.
Not where the two conflict on a matter concerning the company. As between the shareholders who sign it, the agreement binds them contractually. But where a term of the agreement conflicts with the articles of association, the articles generally prevail, and a term found only in the agreement may not bind the company — Indian courts have applied this strictly to share-transfer restrictions. And no agreement, and no article, can override the Companies Act, 2013 itself. The practical answer is not to make the agreement override the articles, but to align them — mirroring in the articles anything that must bind the company.
Before it is needed. The agreement earns its value at trigger moments — a founder leaving, an investor joining, a deadlock, or a sale — and those are exactly the moments when it is too late to negotiate one. The two natural points to put an agreement in place are at the start, when founders first share ownership, and at the first external investment, when the structure of control and exit is being set. Reviewing an existing agreement is also worthwhile whenever the ownership or control of the company materially changes.
The firm advises founders, investors, and closely held companies on drafting, reviewing, and negotiating shareholders' agreements, aligned with the Companies Act, 2013 and the company's articles. Matters are handled for clients in Kerala and across India.
luka@lukeandluka.in+91 96057 61330