This article is written by R Sai Gayatri from Post Graduate College of Law, Osmania University. This article deals in detail with a shareholders’ agreement, its essential contents and the role it plays in creating a regulation between the shareholders and the company. 

This article has been published by Sneha Mahawar.

Introduction 

A shareholder is an individual who invests their money into some company in return for getting a certain number of shares in such a company. By the virtue of the shares bought by them, they are entitled to become one of the owners of such a company. The shareholder also gains certain rights concerning the matters of such a company such as the right to vote. A shareholders’ agreement, also known as a stockholders’ agreement, is an agreement made among shareholders that explains how a company must be operated in certain circumstances and outlines the rights and obligations of the shareholders. The purpose of a shareholders’ agreement is to protect the interests of the shareholders, including minority shareholders, i.e., the ones holding less than 50% of the shares in the company. Let us know more about shareholders’ agreement through this article.

Shareholders’ Agreement – a brief understanding

A shareholders’ agreement is a contract between the shareholders of a company and the company itself. It ties the shareholders to rules to preempt issues that might become contentious in the future. A shareholders’ agreement mentions the shareholders’ rights and obligations, regulates the ownership of shares, privileges, the management of the company, voting and various other insulative provisions for shareholders.

It is a known fact that the Articles of Association (hereinafter ‘AoA’) act as the Constitution for a company and thus they are mandatory and standard in nature. AoA ties a company and its shareholders in their capacity as shareholders and further mentions the responsibilities of the directors, the means by which the shareholders exert control over the board of directors and the kind of business to be undertaken.

When it comes to a shareholders’ agreement the protection of the shareholders is given more importance. Even though a shareholders’ agreement may include certain terms from the AoA, it has no specific format i.e., the shareholders’ agreement can be as flexible and extensive as required by the shareholders according to their needs. While AoA is a public document, the shareholders’ agreement is a private document because it contains confidential internal information of a company. A shareholders’ agreement is an affordable option to reduce the risk of possible business disputes because it specifies how decisions must be made regarding certain disputes including the provision of a framework and procedures for dispute resolution.

The AoA and a shareholders’ agreement must be complementary to each other. However, a shareholders’ agreement may contain a supremacy clause to ensure that it overrides the AoA in case there is any inconsistency so that the shareholders can amend the AoA as required.

Contents of a shareholders’ agreement

The terms included in a shareholders’ agreement may depend on various aspects such as the nature and size of a business, the amount of investment and number of shareholders, etc. A shareholders’ agreement can be as simple or as complex according to the requirements of the shareholders and the company. However, the following contents are usually included in a shareholders’ agreement whether it is simple or complex in nature –

Parties to the agreement

The shareholder agreement recognizes and mentions the company as one party that is different from the shareholders, i.e., another party.

Board of directors and board meetings

The shareholder agreement mentions the role of the board of directors in the company. It also states that the decisions of the board should be approved by the majority. Further, the details as to how frequently the board of directors should hold meetings and how the directors must be selected and replaced are also mentioned in a shareholders’ agreement.

Rights of a shareholder

A shareholder is entitled to certain rights with respect to the company. Therefore, the shareholders’ agreement mentions the rights of the shareholders. Some of the shareholders’ rights are –

• Right to call for a General Meeting
• Right to vote
• Right to appoint directors and take legal action against them
• Right to appoint the company auditor
• Right to inspect the registers and books of the company
• Right to summon the copies of the financial statements of the company
• Right to be informed about winding up of the company

Liabilities of a shareholder

It is understood that the shareholders are not liable for the acts of the company. However, shareholders may be liable to the extent of the unpaid amount of the share capital regarding the shares held by them. In case the company is limited by guarantee, then the shareholders may be liable to the extent of the amount guaranteed by them. The premise of limited liability of the shareholders is based on the concept that the company is a separate legal entity from the shareholders, i.e, another party. Thus, it becomes important for a shareholders’ agreement to mention the liabilities of the shareholders.

Reserved matters

A shareholders’ agreement must outline the issues that cannot be passed without getting the approval of all signatories, which includes majority support. When a list concerning reserved matters is made, all shareholders are given the chance to vet certain transactions to decide if they are prejudicial to their investment. Generally, under reserved matters, the information regarding acquiring or disposing of certain assets, paying dividends, changing the AoA and memorandum, changing share capital, taking a new debt, etc are included.

Shareholders’ information and meetings

A shareholders’ agreement must include a requirement that the shareholders are entitled to receive regular updates on the company’s performance by means of quarterly reports and an annual report. It should state the specific period when the reports should be sent out to shareholders. A shareholders’ agreement must also mention when shareholder meetings will be held and the date, time and venue of such meetings.

Share capital and share transfers

A shareholders’ agreement must record the company’s share capital on the date when it is signed. Because changing the share capital is one of the reserved matters, the directors are not allowed to issue new shares or change the existing shares into a new share class without the signatories approving such changes. A shareholders’ agreement must also contain the provisions relating to share transfer, such as preventing share transfer to unwanted parties, transferring shares to a new party, consequences in the event of the death of a director or shareholder, as well as ‘drag along’ and ‘tag along’ provisions.

Drag along provisions operate when an offer is received to buy all the shares in the company and a majority of the shareholders are ready to accept such an offer. The rights allow the majority to require the other shareholders to also accept the offer for the transaction to be successful. Tag along provisions enable the minority shareholders to “tag on” to a majority shareholder in a share sale case, wherein the majority shareholders attempt to sell only their shares rather than trying to find a buyer for all the shareholders which includes the minority shareholders.

Amendment and termination

A shareholders’ agreement must mention the process of amending or terminating the shareholder agreement. For instance, a shareholders’ agreement may be terminated upon the dissolution of the company, based on a written agreement, or after the lapse of a specific period from the date of the agreement.

Procurement of finances for the company

Since the shareholders are given copies of the financial statements, they can track the progress and the needs of the company. If the shareholders find that there is a need for funds for the growth of the company, then they can trace out a proper source of funding for the said purpose. The procedure for procuring such finances must be included in the Shareholders Agreement.

Valid meeting and quorum

A shareholders’ agreement must specifically mention the requirements regarding a quorum. The quorum herein refers to the minimum number of members required to hold a valid meeting.

Valuation of the shares of the company

A shareholders’ agreement must mention the information regarding the valuation of the shares of the company. Since the market is extremely fluid, the value of the shares of a company may fluctuate accordingly. But, to create the financial statements the valuation of the shares must be done correctly because they have a material impact. There are a few methods of valuation of shares such as the assets approach, income approach and market approach.

Functioning of the company

A shareholders’ agreement should include the guidelines regarding the functioning of a company on a daily basis to ensure sustainable and consistent workflow in the company. Such guidelines must include the procedure and policies to further create a favourable situation for the smooth operation of the company matters.

Protection of minority shareholders

Minority shareholders are those who hold less than 50% of the shares in a company. Since the minority shareholders do not have much power over the management of the company, their protection is important. A shareholders’ agreement must therefore provide for the protection of minority shareholders. The Companies Act, 2013, mentions the rights of the minority shareholders such as the –

• The requirement to appoint a Small Shareholder Director (Section 151 of the Companies Act, 2013)
• Right to apply to the Board in case of oppression or mismanagement (Section 241–246 of the Companies Act, 2013)
• Right to be included when the majority of shareholders sell their shares. This concept is known as Piggy Backing.
• Right to institute a class action suit against the company and the auditors. (Section 245 of the Companies Act, 2013)

Role of a shareholders’ agreement

The point of having Articles of Association is to ensure that the functioning of a company is done according to the provisions and rules mentioned in it. However, a shareholders’ agreement is not as rigid as the AoA because it allows the shareholders to create the rules according to which the company will operate in a flexible manner or as required by them. A shareholders’ agreement plays a key role in the functioning of a company because it binds the shareholders and the company together. The following are some of the reasons as to why shareholders’ agreement is required and the role it plays –

More control in the hands of the shareholders

Usually, the daily operation of the company is handled by the board of directors, however, when a shareholders’ agreement exists, certain ‘reserved matters’ (as mentioned in the shareholders’ agreement) will require the approval of the shareholders before being executed rather than being left to the discretion of the board of directors.

Avoiding shareholder disputes

Since the shareholders’ agreement will mention the framework and procedure for dispute resolution, many of the disputes that generally arise between the shareholders may be easily resolved or even avoided.

Stability of business

A shareholders’ agreement can prove to be an important tool that ensures stability in the business of the company. Such stability can be appealing to the creditors, banks and potential investors that may want to invest in the company. The stability will also clearly speak for itself thereby showcasing the healthy relationship amongst the shareholders.

Specific shareholder rights

The shareholders’ agreement has the power to enable the individual shareholders to involve themselves in the matters such as the appointment of directors or receiving operational information regarding the company. Thus, it can be understood that by the virtue of a shareholders’ agreement the individual shareholders will have a chance to be heard.

Restrictions when exiting the company

By virtue of a shareholders’ agreement, when a shareholder exits the company, the restrictive covenants shall operate to protect the legitimate business interests of the company including the element of protection that would not exist if a shareholders’ agreement did not exist.

Protection for the majority and minority shareholders

The provision of the ‘drag along’ rights in the shareholders’ agreement enables the majority shareholders to eliminate the potential obstacle of minority shareholders not agreeing to sell their shares to a buyer who has offered to acquire the company. On a similar note, a shareholders’ agreement can usually be amended only by the means of unanimous consent of the shareholders. However, the ‘tag along’ provision in the shareholders’ agreement gives the minority shareholders an opportunity to participate in a sale being made by the majority shareholders.

Control over share transfers

In a shareholders’ agreement, the share transfer provisions like the transfer restrictions and pre-emption rights are talked about. The share transfer provisions act as a practical tool to determine who is entitled to acquire and hold shares in the company.

Factors to consider while drafting a shareholders’ agreement

The basic requirement while drafting a shareholders’ agreement is to ensure that the terms and provisions included in it are in accordance with the relevant laws. It is important to understand the objective behind the shareholders’ agreement, i.e., the creation of balance of interests. A shareholders’ agreement cannot be favouring the shareholders in a manner that contradicts the best interests of the company, the Articles of Association or the board of directors. The provisions and rules set out in the shareholders’ agreement must always be legitimate and free from bias. The procedures, guidelines and policies mentioned in the shareholders’ agreement must be brief and rational. The shareholders’ agreement must protect the shareholders to such an extent wherein the ecology of the company will not be disrupted.

As aforementioned, a shareholders’ agreement contains a plethora of terms and rules. The point to take care of here is that such terms and rules must mandatorily have crisp clarity. As they say, “too many cooks spoil the broth”, the same may occur in the case of a shareholders’ agreement. Where there are so many terms to keep in mind, it becomes imperative to have a proper understanding of such terms to avoid further confusion or potential disputes. This includes the clear and concise specification of the rights, duties and obligations of the shareholders and the company.

A shareholders’ agreement can make it or break it which means that it can create a healthy bond amongst the shareholders and the company or create further problems. To avoid such problems and to further maintain strong relations between the shareholders and the company the shareholders’ agreement must in fact be conclusive.

Example of a shareholders’ agreement

The following is an example of a shareholders agreement for a startup. An agreement for a startup shall include the following terms –

1. A preamble, identifying the parties (for instance, a company and its shareholders);
2. A list of recitals (rationale, spirit and goals for the agreement);
3. Details of optional and mandatory buying-back of shares by the company if a shareholder gives up their shares;
4. A right of first refusal clause, elucidating how the company has the first right to purchase a selling shareholder’s securities before them selling such shares to an outside party;
5. Notation of a fair and rational price for shares, either re-calculated as per a formula or annually;
6. A potential detailed description of an insurance policy.

Sample of a shareholders’ agreement

Disclaimer: The following is just a sample draft of a shareholder’s agreement that has been taken from https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Tools_templates/internal_templates/startup_founders_sha_sample.pdf.  

Shareholders’ Agreement of [Company name] company

1. Partners to the Agreement

[Company Name] [Company Type], a Company in planned to be registered in [Country, City] (hereinafter referred also as the Company) for [Summary of what company does] (hereinafter referred also as Company services),

Partners:

1. [Partner Name], [address], [Personal or Business ID if any] (hereinafter referred also as [initials])
2. [Partner Name], [address], [Personal or Business ID if any] (hereinafter referred also as [initials])
3. [Partner Name], [address], [Personal or Business ID if any] (hereinafter referred also as [initials])

2. Ownership of the shares

The ownership of the shares (total [Number of shares]) is presented in the table below.

Shareholder	Number of shares	%
[Partner Name]
[Partner Name]
[Partner Name]

3. Background and Rationale and the Spirit of this Agreement

This Shareholders’ Agreement defines the co-operation principles between the Partners, and related measures and responsibilities.

The Partners have recognized a growing market opportunity to provide company services to [customer types] [In what markets]. The Partners have agreed upon pursuing this opportunity by their engagement with The Company.

The goal of the Partners is to develop the Company rapidly into [What type of Company is being targeted; size, scale, etc.]. The initial business outline is presented in the [Annex 1 ie. company presentation/business plan], and related revenue allocation structure is presented in Exhibit D. The Company develops the plan continuously based on the market feedback and opportunities.

The purpose of this Agreement is to protect the interests of the Partners. It is not meant to punish a Partner who unintentionally breaches this Agreement and discontinues his or her misconduct after notification from other Partners.

In this spirit, the Partners agree not to sell The Company’s shares to outsiders when share disposal restriction provisions of this Shareholders’ Agreement (hereinafter referred also as Agreement) restrict the selling of the shares.

4. General Commitments

The Partners agree to the following:

We, as the Partners to this Agreement, agree to conduct our tasks in the field of The Company’s business operations in the interests of the Company. All immaterial and other property rights created during or directly related to The Company’s business development process will become the property of The Company unless agreed otherwise in written by all Partners.

Tasks and/or roles of the Partners :

[Partner] [Role/Title]

Main tasks & responsibilities:

1. manage the business
2. etc.

Related incentive plan presented in Exhibit C

[Partner] [Role/Title]

Main tasks & responsibilities:

1. manage the business
2. etc

Related incentive plan presented in Exhibit C

[Partner] [Role/Title]

Main tasks & responsibilities:

1. manage the business
2. etc

Related incentive plan presented in Exhibit C

5. Proceedings

By default, each Partner can freely vote in a shareholders’ meeting. However, the Partners agree on two exceptions to the above:

Firstly, if more than 2/3 of the shares owned by the Partners are supporting certain voting behaviour, then all Partners will vote in agreement with the 2/3 majority of Partners. The purpose is to ascertain that the Partners will be unified, acting as a single group, even in the situations when there would be other shareholders in the Company than the Partners alone.

Secondly, certain decisions will require support by Partners holding at least 90% of all Partner shares; otherwise, all Partners agree to vote against these decisions. The decisions are the following:

1. Increasing and decreasing the share capital,
2. Issuing new shares,
3. Issuing convertible loans or options that can be transferred to shares,
4. Selling all or a major part of the business of the company,
5. Authorizing the Board to make decisions listed above.

To implement the proceedings described above, the Partners agree to efficiently work together at the shareholders’ meetings and before them. Any Partner may call the partners to meet in two week’s notice, either in person if possible, or over the internet/telephone, and otherwise following the protocols used for inviting a shareholders’ meeting. The Partners will do their best effort to find meeting times – several meetings if necessary – to work out their common voting strategy. The Partners agree to participate in all shareholders’ meetings, either in person or by proxy instructed to follow the proceedings described above.

6. Competition Restriction Clause

The Partners who have an active role in The Company undertake not to compete in any way, directly or indirectly, with the business of The Company. Here, the following definitions are used:

1. Active role in The Company is defined as being either employed by The Company, or acting as a Board director, advisor, or consultant for the company.
2. The business of The Company is defined based on the strategy, business plans, customer relations and pipeline, product roadmaps, and IPR’s of The Company at any given time.

If a Partner ceases to have an active role in The Company, then the Partner agrees not to compete in any way with the business of The Company as defined at that moment, during the following [number of months i.e., 12].

In addition to the above, all Partners (not just those having an active role in The Company) agree not to compete in any way with the business of The Company during the first [number of months i.e., 6] after signing this Shareholders Agreement of the company.

If The Company decides to change its strategy, business plan or business focus, this change and new business plan must be communicated to each Partner. If a competitive situation follows from the change by The Company, this is not considered as a breach of this Competition Restriction Clause.

If one or several Partners materially breach this Competition Restriction Clause and do not correct the breach within [number of days i.e., 30] after being notified about the breach by The Company or other Partners having at least 2/3 of the remaining Partner shares, with shares of the Partner(s) breaching the Clause excluded, then the following sanction will be applicable:

The Partner(s) breaching the Competition Restriction Clause agree to sell their shares at a price that is 10% of their fair market price (as defined in Clause 9 below), pro rata of the other Partners’ ownerships. In addition, each Partner breaching the Clause agrees to pay [EUR i.e., 30,000 Euros] to The Company.

This breach shall be documented by the Board and it shall be proven to be harmful (e.g. The Company has lost business or competitive advantage) for The Company.

The Partners shall be deemed to have provided written consent in terms of this Chapter 6 to each Partner current ownership of and role/appointment in other companies/businesses and other activities as set forth in Exhibition B and each of the Partner shall not be in breach of this Chapter 6 in relation to any such ownership, role, appointment or activity.

7. Buy back option in normal partner exit situation and share disposal restrictions

The Partners undertake not to transfer their shares to third parties before [number of months i.e., 36] of signing the shareholder’s Agreement for the first time unless otherwise agreed in writing by the Partners holding at least 90% of the shares of the Company. Each Partner shall inform the other Partners about any intent to transfer the Partner’s shares, and about the information to be given to third parties in connection with such intent to transfer shares.

The Partners to this Agreement have the right to buy shares back for a period of [number of months i.e., 12] from the resignation of a Partner if the buyback has not materialized earlier.

8. Exit

In connection with the Liquidation Event, any Net Consideration shall be distributed pro-rata between the shareholders.

9. Abnormal Exit Situations

In the event that the Partner leaves the Company as a Bad Leaver, a defined percent as defined in Exhibit A of his shares shall be subject to mandatory transfer to the Company at their nominal value.

A bad leaver is any shareholder that discontinues to be employed by the Company, in a consultant-relation with the Company, a board member before the Milestones as described in the Exhibit A has been achieved for any of the following reasons:

1. does not contribute the agreed minimum time and/or effort to the Company on an ongoing basis, as agreed by partners, and continues to not contribute after notification from other Partners.
2. material breach of this Agreement;
3. gross misconduct or any serious or persistent breach of any obligation to the Company or any associated Company of the Company;
4. conviction of a criminal offence (for which a custodial sentence is imposed) by a court of competent jurisdiction; or

A Bad Leaver is determined by 3/4 of the Partners agreeing, backed with proper documentation.

10. Rules Governing Share Disposal

If any of the Partners, (the “Selling Partner”), negotiates with a third party/Partners (“the Buying Parties”) on the transfer of its shares, the Selling Partner undertakes to promptly notify the other Partners in writing (“Tag-Along Notice”) about such intent. Other Partners shall have the right, but not the obligation, to require the Selling Partner to cause that, either all, or proportionately the same amount of their shares, as the Selling Partner intends to transfer are purchased by that Buying Party/Partners (“Tag-Along Right”) at the same consideration and otherwise on the same terms and conditions obtained by the Selling Party. In such share transfer, the Selling Partner shall make best efforts to find a third Partner to whom all of the shares could be transferred at market price. The other Partners respectively must inform the Selling Partner within [number of days i.e., 30] from the receipt of the Tag-Along Notice whether they wish to use their respective Tag-Along Rights.

In the event that a group of owners holding the majority of Company shares (“Majority Holders”) have found a candidate (“Third Partner Offeror”) who wishes bona fide to purchase all of the shares of the Company, the Majority Holders shall have the right but not the obligation, to require that the other Partners to this Agreement transfer their shares to the Third Partner Offeror (“Drag-Along Right”) at the same consideration and otherwise on the same terms and conditions obtained by the Majority Holders. The Drag Along-Right shall be exercised by a notice submitted to the other Partners at least [number of days ie. 30] before the consummation of the transfer of shares from the Partners to the Third Partner Offeror.

A transfer of shares from a Partner to a third party must always happen simultaneously with the third-party becoming also a partner in this Shareholders agreement, and the selling Partner is responsible to see that this happens.

11. Market Value Determination

If the shares are to be valued based on provisions of this Agreement, and if the Partners concerned cannot agree on what the market value for the shares will be, the market value shall be determined on the basis of an arms-length third Partner purchase offer for the shares. In the absence of such an offer, a respectable financial advisor or investment bank appointed by the Board of Directors shall determine the market value.

12. Disclaimers and Order of Interpretation

The Agreement here is understood by all the Partners to contain all relevant questions currently concerning the governance of the Company.

This Agreement supersedes – only for the above-mentioned issues handled within this Agreement– any arrangements, understandings, promises or agreements made or existing between the Partners hereto, prior to, or simultaneously with the Agreement and constitutes the entire understanding between the Partners hereto.

If this Agreement, related Agreements and documents or the Articles of Association are inconsistent with each other, the documents shall be interpreted in the following order:

1. this Agreement;
2. other Agreements or documents signed between the Partners
3. the Articles of Association of the Company.

If the Partners decide to modify this Agreement it has to be done in writing and signed by and on behalf of all Parties. In that Agreement, there must be a clause mentioning that this is a modification to the existing shareholder’s Agreement or the modification must be otherwise evident by the circumstances.

13. Other Shareholder Agreements

The Partners understand and are aware that some of the Partners have existing shareholder agreements or competition restriction clauses in other companies. These agreements restrict competition. The Partners agree to make their best effort to avoid conflicts with these other shareholder agreements and competition restrictions. The Partners agree that if any Partner encounters liabilities from these agreements or restrictions, the Company will cover those liabilities, including but not limited to compensation payments and legal costs. The Board shall make the final decision, to what extent the Company covers the costs.

14. Insight and confidentiality

The Partners shall hold in confidence and shall not disclose to any third Partner without the prior written consent of all the Partners the material contents of this Agreement unless disclosure is required by law, regulation, stock exchange rules or order of a court of competent jurisdiction.

The Partner under an obligation to make a disclosure as defined hereinabove shall use its best efforts to notify other Partners before making the disclosure.

The Partners shall not at any time hereafter disclose or communicate to any person (other than, where relevant, to their officers, employees or professional advisors, whose position makes it necessary to know the same) any confidential information concerning the business, accounts, financial or contractual arrangements or other dealings, transactions or affairs of the Company or any of its subsidiaries which may be within or which may come to its knowledge save for;

1. such information that at the time of disclosure is public knowledge,
2. when disclosure is required by law, regulation, stock exchange rules, or order of a court of a competent jurisdiction.

Any Partner wishing to disclose confidential information to a prospective transferee of shares and to their representatives and advisers shall first obtain an appropriate commitment as to confidentiality before making the disclosure.

15. Communication among Partners to the Agreement

Any communication between the Partners concerning this Agreement will be in writing and will be delivered in person or by e-mail in such a way that the recipient confirms having received the information, or sent by registered mail and fully prepaid in an envelope properly addressed to the address given by the Partner to the Company or to other Partners. Any such notice will be in the English language and will be considered to have been given at the time when actually delivered and confirmed by all Partners or in any other event between [number of days ie. 14] after it was mailed in the manner hereinbefore provided.

16. Costs

Each of the Partners hereto will bear his/her or its own legal, accountancy and other costs, charges and expenses connected with the negotiation, preparation and implementation of this Agreement and any other Agreement incidental to or referred to in this Agreement.

17. Assign Ability

This Agreement cannot be assigned by any one of the Partners without the prior written consent of the other Parties.

18. Disputes and Governing Law

This Agreement will be governed by and constructed in accordance with the laws of [Country]. Any disputes arising out of this agreement shall be resolved in the [District Court or other] of [City, Country].

19. Term

This Agreement becomes effective upon the signature by all Partners and shall be binding on each Partner as long as that Partner is the owner of the Shares or other Equity Securities. This Agreement shall, however, be terminated upon the consummation of a Trade Sale or an IPO.

Notwithstanding the aforesaid, Sections 7 – 10 (Competition Restriction Clause, Buy Back Option in normal Partner Exit Situation and Share Disposal Restrictions, Abnormal Exit Situations, and Rules Governing Share Disposal) and Sections 18 (Disputes And Governing Law) will be binding, to the extent applicable, upon the Party even if the Party has ceased to be a Party to this Agreement.

20. Ancillary Provisions and Signature

Except as otherwise provided herein, no addition, amendment to, or modification of this Agreement will be effective, unless it is made in writing and signed by and on behalf of all Parties.

There will be no waiver of any term, provision, or condition of this Agreement unless such waiver is evidenced in writing and signed by the waiving Parties.

No omission or delay on the part of any Partner hereto in exercising any right, power, or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise of any such right, power, or privilege preclude any other. The rights and remedies herein provided are cumulative with and not exclusive of any rights or remedies provided by law.

In the event that any of these terms, conditions, or provisions will be determined invalid, unlawful, or unenforceable to any extent, such term, condition, or provision will be severed from the remaining terms, conditions, and provisions which will continue to be valid to the fullest extent permitted by law.

This Agreement has been executed in [number of copies] identical originals and reviewed completely by the Parties, signed after approval, and all pages in appendixes inclusive initialed by the Parties. The Company has received one and each Partner has received one original bearing the following legally binding signatures.

This Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof and merges and supersedes all prior and contemporaneous discussions, agreements, and understandings of every nature between the parties hereto.

This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.

[Partner & title/role] [Partner & title/role] [Partner & title/role]

Exhibit A

Before Milestone 1 all (100%) of the shares shall be subject to mandatory transfer. After that the percents of the mandatory transfer, when each milestone is achieved, are the following:

1. Milestone 1 definition, ninety (90) percent of the shares shall be subject to mandatory transfer:

• [time and/or development stage of company]

2. Milestone 2 definition, seventy (70) percent of the shares shall be subject to mandatory transfer:

• [time and/or development stage of company]

3. Milestone 3 definition, fifty (50) percent of the shares shall be subject to mandatory transfer:

• [time and/or development stage of company]

4. Milestone 4 definition, zero (25) percent of the shares shall be subject to mandatory transfer:

• [time and/or development stage of company]

Exhibit B

Current Roles [if any]:

[Partner name]

1. [any role in other company/entity where having commitments]
2. etc.

[Partner name]

1. [any role in other company/entity where having commitments]
2. etc.

[Partner name]

1. [any role in other company/entity where having commitments]
2. etc.

Exhibit C

Additional incentives [Per partner if any]

1. [number of shares] shares (or stock options representing equal amount of shares) from the allocated company incentive options pool after reaching the below targets:
   1. [Additional target per person/role]
   2. [Additional target per person/role]
   3. [Additional target per person/role]
   4. etc.
2. [Additional external compensations if any]*
   1. [Additional target per person/role]
   2. [Additional target per person/role]
   3. etc.

*a separate agreement will be executed to cover [type of] incentives.

Targets will be re-evaluated periodically and new targets with new incentives set as needed.

Exhibit D

Revenue allocations

Initially after external third party costs are covered

1. [percentage ie. 25%] is kept for [company] administrative, marketing and development support
2. [percentage ie. 75%] is used for operative Management and related costs as defined by [CEO or partners together]

Operative Management* and related costs revenue allocation

1. [Person 1]
2. [Person 2]
3. etc.

After project related external third party costs and operative management allocations are covered

• [percentage ie. 75%] of the revenue is handled normally as company income
• up to [percentage ie. 25%] can be used for operative Management and related bonuses (case by case up front approval)

Company revenue is used to enable

• [investments in growth outline of targeted usage]
• [Other]

*The personal maximum monthly compensation can be EUR [how much max.] (first calculated 25% for the company and then shared to sales and execution resources) if the company also reaches its monthly revenue and profit target. If the company doesn’t reach the targets, the personal maximum is EUR [how much min.]. If the company reaches at least 75% of its targets the personal maximum grows from [min to max] linearly, e.g. if the company reaches the targets 87.5%, the personal maximum can be EUR [calculated based on percentage].

Exhibit E

List of incentive structure for [company] additional team/resources [if any]

1. Option Compensation model [if available]
2. Revenue share model [if available]
3. Commission model [if available]

Conclusion

A shareholders’ agreement has a primary objective and that is to ensure the smooth functioning of the company. A shareholders’ agreement further provides a certain level of clarity and specific structure concerning the relationship between the shareholders and the company. The provisions and the terms included in a shareholders’ agreement help in efficient and expeditious resolution of disputes thereby soliciting potential investors, banks and creditors for the company because it clearly showcases the healthy relationship amongst the shareholders.

References

• https://www.advocatekhoj.com/library/agreements/companylaw/17.php
• https://cleartax.in/s/shareholders-agreement-format-download
• https://corporatefinanceinstitute.com/resources/knowledge/finance/shareholders-agreement/
• https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Tools_templates/internal_templates/startup_founders_sha_sample.pdf 

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