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This article has been written by Rachit Singh, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.


In the year 2015, Heineken bought United Spirits’ shares in India’s largest beer-making company, Kingfisher for 137 US million dollars. United Spirits possessed 3.21 percent of shares in a prominent beer-making company United Breweries which were sold to the Dutch-based beer-making company, Heineken for the aforementioned amount. United Breweries had several brands under its portfolio including Kalyani black label, Guru, Zingaro, Bullet, etc. One of the most prominent beer-making brands that United Breweries held was Kingfisher which was India’s largest beer manufacturer.

Heineken now became the single largest shareholder of the firm, United Breweries. This transaction also established Heineken as the third-largest beer manufacturer in the world. Heineken now had a significant role to play in the beer-making market of India since its acquisition of stakes in the United Breweries which were earlier held by the Diageo-controlled United Spirits. As of December 2018, the Dutch company Heineken possessed 43.7 percent of equity shares in United Breweries while Vijay Mallaya, the chairperson of United Breweries(UB) Group and other companies held 14 percent of stakes in it. As of March 2019, the Dutch-based company increased its stakes in the UB Group by a margin of 2.8 percent.    

Shareholders’ agreement and its importance

A shareholders’ agreement also termed as a stockholders agreement is an agreement or arrangement between the shareholders of the particular company that lays down the guidelines, rules, and regulations on how that company should operate its business. The Shareholders’ agreement also prescribes the rights and obligations of the shareholders of the company irrespective of their stakes in it. This is an exhaustive agreement that tends to cover information about the management of the company, its affairs, and the privileges and protections granted to the shareholders. 

The basic intention behind drafting such an agreement is to ensure that every shareholder of the company will be treated fairly and his/her rights shall be protected by the provisions mentioned in the agreement. There are several clauses in the shareholders’ agreement that serves as protection to the minority shareholders so as to eliminate any unwanted leverage to the majority shareholders. The outlines of this agreement also help in regulating the pricing of the new shares being issued in the market. These clauses also allow the existing shareholders to make decisions about the outside/third parties who might hold stakes in the company in near future. This agreement is of utmost importance in the domain of the governance of the company, this agreement enables the shareholders in decking fundamental decisions pertaining to the business, financing, and business structuring. Although the agreement is paramount towards maintaining a peaceful relationship between the shareholders, there are no legal obligations or statutes which govern such agreements. There are no legal formalities prescribed by any statutory authority for its creation. However, it is based upon the principles of the Contract Act and various other legal principles.    

Key elements regarding the shareholders’ agreement between the aforementioned companies

Each and every clause of the shareholders’ agreement is important as they are critical towards minimizing the potential business disputes which might arise during the course of business among the shareholders but there are some key clauses/elements which might vary due to the nature of business the company intends on doing. In the case of Heineken, Kingfisher, and United Spirits, all these companies are involved in a beer-making business and raise their capital through the issue of shares, hence it is essential for such business ventures to draft a shareholders’ agreement. Some of the important clauses which they should consider while drafting their shareholders’ agreement are – 

Share transfer

This is a basic clause of almost every shareholders’ agreement that addresses the provisions regarding the transfer of shares. It usually describes three types of commonly practiced share transfers, such as permitted, voluntary, and automatic. 

(a) Permitted share transfers are the transfers that occur when an existing shareholder transfers their shares to another shareholder or to an entity controlled by an existing shareholder or to any of his/her relatives.

(b) Voluntary transfers are transfers that depend entirely upon the disposition of the existing shareholder. Such shares can be transferred through sale, an assignment, encumbrance, or pledge, these mediums include direct and indirect transfers.

(c) Automatic transfer are transfers which occur when any shareholder has breached the provisions of the agreement or dies or gets convicted of a crime or files for bankruptcy or gets dissolved, etc. in such instances the shares of that person are automatically transferred to another and the transferee is decided either by the provisions laid down in the shareholders’ agreement or during the meeting between the existing shareholders.

Companies should draft this clause with utmost care and caution as such transfers might cause disputes among the existing shareholders and insert provisions regarding the transfer restrictions so as to protect the shareholders from any undesirable third parties that might become shareholders through these transfers.

Buyback rights and rights of first refusal

During the events of a transfer of shares with permitted transfers being the exception, this clause enables the company to buy those shares back. The company will have the exclusive right over such shares in the event of share transfer. In the event of permitted share transfer, the prices for such buybacks would generally be determined by a valuation mechanism provided within the provisions of the shareholders’ agreement. In the case of a voluntary transfer, such shares might be valued upon the willingness of the transferee, ie. the person or authority to whom such shares are being transferred. In the case of automatic transfer, the shares would be valued at their market price. 

The clause of Rights of First Refusal states that in the events of transfer of shares the company decides to not exercise its buyback rights or only partially exercise them then in those instances the non-transferring existing shareholders will have a preference over others to claim those shares in proportion to their existing stake in the company’s share. Thus such clauses must be drafted carefully while making the shareholders’ agreement.

In the event of a voluntary transfer, the selling shareholders are bound to propose an offer to every other shareholder in proportion to their respective share ownership. This clause in the shareholders’ agreement protects the minority shareholders from being forced to accept a deal that might not be of any interest to them. Therefore this clause provides protection to the minority shareholders of the company by giving them the right but not an obligation to sell their shares with the majority shareholders. The United Breweries group which holds a minority share as compared to Heineken in United Spirits, UB group must ensure that this clause is inserted in the shareholders’ agreement at the time of agreeing to the terms and conditions of a transaction. 

Drag-along rights

In the event of the sale of the company’s entire or partial shareholding, this clause enables the majority shareholders to compel all the minority shareholders of the company to sell the share during such process. In doing so the majority shareholders must ensure that the minority shareholders are receiving the same value, terms, and conditions on their respective shares from the buyers as them. 

Such a scenario often arises during a merger or an acquisition because the company buying those shares tends to achieve complete control over the company. 

The Drag-along clause is somewhat opposite of the preceding clause as it facilitates the majority shareholders’ cause and allows the sale of the company’s securities to the new buyer. However, this clause also benefits the minority shareholders of the company as it mandates the majority shareholders to sell every share of the company for the same price as theirs, which enables the minority shareholders to obtain the amount of value over shares as the majority shareholders of the company. Hence in the event of such sale of the company’s assets/securities the UB group and Heineken must form consensus over this clause as it is critical for the future conduct of business.  

Information rights

This critical clause of the shareholders’ agreement states that every shareholder of the company irrespective of their stake shall have the right to access the company’s financial and management reports that are generally published once every year. The majority shareholders may be granted a right to access those reports on a monthly/quarterly basis. Such investors/shareholders might be entailed with other overseeing rights such as company visits, meetings with officers/managers of the company, and a permit to copy records of the day-to-day business of the company. 

Board of directors 

This clause of the shareholders’ agreement specifies the nature of the board of directors of the company i.e. the number of people as board members, their names, positions, and other details). This clause might also vest certain rights to specific shareholders to appoint board members and the other shareholders without such right must vote according to the provisions mentioned in the company’s articles of association. In the case of United Breweries and Heineken, it is necessary to insert this clause in the shareholders’ agreement as both these companies will conduct business within the same domain and premise hence they need to decide upon the matters of board members in order to avoid any disputes regarding the business decisions.


Such events arise when capital is being raised or when new or existing shares are issued in the market. Dilution is a scenario where there is a reduction in a shareholding that can either be a value dilution or percentage dilution. Such a clause in the shareholders’ agreement gives the right to the shareholders/investors of the company to maintain their respective ownership of shares proportionately by allowing them to acquire the proportionate amount of shares at the time of their sale at a predetermined or adjusted price. 

Typically there are three types of anti-dilution provisions drafted in the shareholders’ agreement, namely, pre-emption rights, ratchet, and weighted-average. Thus it is important for every shareholder’s agreement to draft this clause carefully as the future shareholding of the company and the longevity of the shareholders in the company depends upon such provisions. The UB Group and Heineken must ensure their shareholders regarding their anti-dilution rights and the shareholders’ agreement must be clear on the type of the anti-dilution process adopted by the management of both the companies, there should be no conflict regarding such process in order to avoid any future disputes.

Shareholders’ non-compete and non-disclosure

This clause of the shareholders’ agreement ensures that the secrets regarding the trade and business of the company, its operating procedures, customer details, market research, financial statements, cash inflow/outflows, and other significant information are protected from being disclosed by the shareholders of the company. The shareholders’ agreement must include such clauses because they bind the shareholders to secrecy and impose liability upon them if they breach the provisions of this clause. The non-disclosure clause will prevent the shareholders from disclosing any sensitive information regarding the business of the company, and the non-compete clause will prohibit the existing or former shareholders of the company to engage in any similar business as that of the company, such clause may expire after a specific period of time or it may exist for eternity. 

Hence the UB Group and Heineken must concur with the provisions of this clause as they are two different organizations with different sets of personnel who are not familiar with each other therefore, it is in the best interest of both parties to clearly define their set of responsibilities and obligations in the shareholders’ agreement.  


The people responsible for drafting the shareholders’ agreement hold the future of the company hence it is their responsibility to recognize and eliminate every possibility of potential future disputes and the surest or the most convenient way of achieving it would be to prepare a shareholders’ agreement that is exhaustive, precise, and maintains a balance between the needs and objectives of the shareholders and investors.   



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