A shareholders agreement (SHA) is the constitutional document of a privately held company — more important, in many respects, than the articles of association, because it governs the relationship between shareholders in ways that the articles cannot. A poorly drafted SHA is a deferred dispute: the omissions and ambiguities that seemed unimportant at closing become battlegrounds when investor expectations and promoter decisions diverge.

This article identifies ten provisions that appear in every well-drafted SHA and the specific risks that each provision addresses.

1. Reserved Matters and Affirmative Voting Rights

Reserved matters are decisions that require the consent of a specified shareholder (typically the investor) regardless of board or majority shareholder approval. Common reserved matters include: approval of annual budgets above a threshold, incurrence of debt above a specified limit, changes to the company’s business, related-party transactions, and changes to capital structure.

Without reserved matters, a majority shareholder can bind the company to decisions that materially affect the investor’s position without any recourse. The scope of reserved matters should be calibrated to the investor’s concern — too narrow, and the protection is illusory; too broad, and it creates operational paralysis.

2. Tag-Along Rights

A tag-along right requires that if a promoter proposes to sell shares to a third party, the investor must be offered the right to sell a proportionate number of their shares on the same terms and conditions. This prevents a scenario where promoters realise liquidity through a sale while minority shareholders are left behind in a company whose dynamics have fundamentally changed.

3. Drag-Along Rights

The mirror image of tag-along: a drag-along right allows a majority shareholder (or a shareholder above a specified threshold) to compel minority shareholders to sell their shares in a third-party acquisition on the same terms. This is essential for investors and promoters seeking a clean exit — a strategic acquirer will invariably require 100% of the share capital, and a minority shareholder who refuses to sell can hold the entire deal hostage.

Tag-along protects the minority. Drag-along protects the majority. Both are necessary in a well-functioning SHA — their balance reflects the negotiated risk allocation between founders and investors.

4. Anti-Dilution Rights

Anti-dilution provisions protect an investor from the economic impact of a subsequent equity issuance at a lower valuation (a “down round”). Broad-based weighted average anti-dilution is the market standard: it adjusts the investor’s conversion price based on a formula that takes into account both the price and the volume of the new issuance, moderating the adjustment relative to full-ratchet anti-dilution (which resets the conversion price to the new round price regardless of volume).

5. Liquidation Preference

A liquidation preference entitles an investor, in the event of a liquidation, dissolution, or deemed liquidation (including a sale or merger of the company), to receive a specified return on their investment before any proceeds are distributed to ordinary shareholders. A 1x non-participating preference — the investor gets back their invested amount and no more — is protective without being punitive. A participating preference — the investor gets their preference back and then participates pro rata in any remaining proceeds — can be economically severe for founders in lower-valuation exits.

6. Right of First Refusal (ROFR)

A ROFR requires that before any shareholder sells shares to a third party, they must first offer those shares to the other shareholders (or the company) at the same price and on the same terms. This keeps ownership within the existing shareholder group and prevents the introduction of unwanted third parties without consent.

7. Deadlock Resolution

Deadlock — where shareholders with equal voting power cannot agree on a material decision — is one of the most disruptive events in a privately held company. Well-drafted SHAs provide a structured resolution mechanism: a multi-step escalation to senior management, followed by mediation, followed — if all else fails — by a buy-sell (Russian Roulette) provision under which one party names a price at which they will buy the other out, and the other party must either accept the sale or buy at that price.

Russian Roulette is a blunt instrument and should be a mechanism of last resort — but its presence in the SHA creates a powerful incentive to resolve disputes through earlier steps before it is invoked.

8. Non-Compete and Non-Solicitation

Promoters and key founders should be bound by non-compete and non-solicitation covenants during their association with the company and for a defined period post-exit. Under Indian law, Section 27 of the Contract Act makes post-employment non-compete clauses potentially unenforceable as restraints of trade, depending on scope and duration. Careful drafting — limiting the geographic scope, activity scope, and duration — is essential to maximise enforceability.

9. Information Rights and Reporting Obligations

Investors require timely, accurate information about the company’s financial position to manage their portfolio and discharge their fiduciary duties. A well-drafted SHA specifies: monthly management accounts (within a specified number of days of month-end), quarterly audited or reviewed financials, annual audited accounts, and prompt notification of material developments. Information rights should survive a shareholder’s exit for the period during which they retain any residual rights under the SHA.

10. Governing Law and Dispute Resolution

The governing law and dispute resolution clause is frequently the last to be negotiated and the first to matter when a dispute arises. For SHAs involving international investors, the choice of Singapore law and SIAC arbitration is common — it provides a neutral forum, sophisticated arbitrators with expertise in corporate disputes, and an award enforceable under the New York Convention in over 170 jurisdictions.

For domestic SHAs, the seat of arbitration, the number of arbitrators, and the institution should be specified with particularity. A well-drafted SHA arbitration clause can mean the difference between a dispute resolved in eighteen months and one that lingers in court for a decade.

Our corporate practice has advised founders, venture capital funds, and strategic investors on shareholders agreement negotiation and drafting across sectors. If you are in the process of raising capital or structuring a joint venture, we welcome the opportunity to advise on the SHA — before the term sheet is signed, not after it is.