Shareholders Agreements: Clauses and Enforceability

Shareholders agreements are contracts among shareholders of a company (to which the company is also usually a party) that confer rights and impose obligations over and above those provided by company law. The agreements provide for matters such as restrictions on transfer of shares (right of first refusal, right of first offer), forced transfers of shares (tag-along rights, drag-along rights), nomination of directors for representation on boards, quorum requirements and veto or supermajority rights available to certain shareholders at board level or shareholder level.

The enforceability of such agreements under Indian law has been a vexed question. Since these agreements have acquired popularity in the Indian context only over the last two decades or so, courts have not been presented with sufficient opportunities to decide upon the enforceability of their provisions. Where courts have indeed ruled on such agreements, it has often been a daunting task to draw common strands that present clarity for parties entering into such agreements. While there does exist one landmark decision of the Supreme Court (V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453, [1992] 73 Comp. Cas. 201), oft-cited in the context of shareholders’ agreements, most other decisions have been rendered by the High Courts in various states (although it must be pointed out that an unduly high proportion of them come from the Bombay High Court for obvious reasons, with Mumbai being the financial capital of India). The High Court decisions are limited in their applicability as they are susceptible to disagreements by other High Courts, thereby conferring limited precedential value. Various High Court decisions referred to in the context of enforceability of shareholders agreements are:

1. Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd., [1999] 97 Comp. Cas. 301 (Gujarat High Court);

2. Smt. Pushpa Katoch v. Manu Maharani Hotels Ltd., [2006] 131 Comp. Cas. 42 (Delhi High Court);

3. Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited, [2010] 154 Comp. Cas. 593 (Bombay High Court);

4. Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29 (Bombay High Court);

5. IL and FS Trust Co. Ltd. v. Birla Perucchini Ltd., [2004] 121 Comp. Cas. 335 (Bombay High Court); and

6. Rolta India Ltd. v. Venire Industries Ltd., [2000] 100 Comp. Cas. 19 (Bombay High Court).

The Indian courts have generally not favoured complete freedom of contract in the case of shareholders agreements where clauses have gone against the tenor of company legislation. Courts have either refused to recognise clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association. It is only recently that the Bombay High Court (in the Messer Holdings decision referred to in item 4 above) recognised rights inter se among shareholders in case of restrictions on transfer of shares by providing a more liberal interpretation. This decision provides some succour to the principle of freedom of contract and enables parties to rely on shareholders’ agreements. However, as mentioned earlier, its relevance may be limited to the extent that it is only a High Court decision and the extensiveness of the principle cannot be taken for granted unless the Supreme Court echoes that view.

Given this background, a useful discussion on the enforceability of shareholders’ agreements in general is contained in a recent report on The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions prepared by the Corporation Law Committee of the Association of the Bar of the City of New York and published in the August 2010 issue of The Business Lawyer. The report contains a listing of the types of clauses included in a shareholders’ agreement, along with drafting considerations. The report, however, contains a discussion on the legal principles embedded in the laws of the states of Delaware and New York. Nevertheless, it is a useful tool for a corporate lawyer in any jurisdiction that can be used as the basis to test the various provisions for enforceability under relevant local law of a company’s jurisdiction of incorporation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Interesting post. Thank you.

    Would you know if Indian Courts have, till now, dealt with the question of shareholders' freedom to contract with a third party outside the company in respect of making promises regarding the exercise of voting rights etc. in a particular manner? It gets particularly interesting if such a shareholder is also a Director, in which case such a contract may conflict with his fiduciary duties as a Director. A Chancery Division judgment (Northern Counties Securities Ltd. v. Jackson & Steeple Ltd., (1974) 2 All ER 625) seems to suggest that while common honesty may require a Director to vote in the same manner in the General Meeting as he did previously in a Board Meeting, a Director should be entitled to have an unfettered right to vote in a General Meeting in law. Would this, I wonder, also give a Director an unfettered right to enter into a contract regarding the manner in which he votes as a shareholder in a General Meeting?

  • Sir,
    See this –

    I have a doubt regarding the ratio in Messrs Holdings. In the aforesaid case, the judgment held as follows: "It is open to the shareholders to enter into consensual agreements which are not in conflict with the AoA, the Act and the Rules, in relation to the specific shares held by them; and such agreement can be enforced like any other agreement..If the company wants to prohibit the right of the shareholders, it may have to provide for an express condition in the AoA, or in the Act and Rules, as the case may be, in that behalf…"
    Reading the aforesaid, I dont think the judgment differs from Rangaraj. It says that a restriction can be placed in SHA only if the restriction is expressly incorporated in AoA. But according to the Business line article which I mentioned above, private arrangement between shareholders is enforceable unless specifically barred by articles of the company. I am unable to agree the Business Line position. What do you think Sir?

  • @Mathews, there seems to be one crucial difference. Rangaraj held that a private agreement imposing a restriction on the transfer of shares is ineffective unless it is incorporated in the articles. Messer Holdings (the passage you extract), on the other hand, holds that such an agreement is effective unless a shareholder is prohibited from entering creating such a restriction by the articles ("if the company wants to prohibit…"). Messer Holdings has in a sense inverted the Rangaraj rule, although whether that is the position of law today is in some doubt, in view of JR Kavasmaneck and the way in which the law has developed post-Rangaraj.

  • Is incorporation of the shareholders' agreement into the Articles of the company a mandatory requireent for enforcing the agreement against the company?

  • @ Anonymous. Based on Rangaraj and other cases, it appears that a company would be bound by a restriction only if is contained in the articles of association. The Messer Holdings judgment has greater relevance on enforcement against a shareholder.

  • To what extent do Agreements require the party to vote in a particular manner or authorize a party to vote on behalf of another (something like an irrevocable proxy)? The companies doesn't seem to expressly prohibit such agreements. But are they widely used in practice? Would be grateful if you could respond. I am writing a dissertation on a related topic for my LLM.

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