Shareholders' Agreement for Indian Private Company

Introduction

A Shareholders' Agreement governs the relationship between founders and investors in an Indian private company — from board composition and reserved matters to transfer restrictions and exit. Under Section 6 of the Companies Act, 2013, where an SHA conflicts with the Articles of Association, the AOA prevails as against the company. The drafting discipline is therefore twofold: negotiate the SHA, then mirror every enforceable right into the AOA. Anything left only in the SHA binds the shareholders inter se but not the company.

When to Use This Prompt

• Closing a seed, Series A, or later equity round with one or more institutional investors.
• Onboarding a strategic or financial partner with board and information rights.
• Setting up a joint venture company with defined contribution and exit pathways.
• Restructuring existing equity arrangements between founders to formalise vesting and roles.

Statutory & Case-Law Backdrop

Companies Act, 2013 — Section 6 (Act prevails over MOA/AOA, AOA prevails over SHA against the company), Section 58 (transfer restrictions enforceable in private companies — Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613), Section 188 (related party transactions). Indian Contract Act, 1872 — Section 27 (restraint of trade — non-compete enforceable only during employment, broadly unenforceable post-exit per Niranjan Shankar Golikari (1967) 2 SCR 378 and Superintendence Co. v. Krishan Murgai (1981) 2 SCC 246). FEMA (Non-Debt Instruments) Rules, 2019 — pricing guidelines, optionality clauses, and exit pricing for non-resident investors. SEBI ICDR — relevant on IPO contemplation.

The Prompt

Paste into ChatGPT, Claude or Gemini. Replace every bracketed placeholder with your specific facts before generating.

Draft a Shareholders' Agreement (SHA) between [FOUNDERS], [INVESTORS] and [COMPANY NAME PRIVATE LIMITED], in compliance with the Companies Act, 2013 and FEMA (Non-Debt Instruments) Rules, 2019 (where any party is non-resident).

Inputs:
- Company: [NAME, CIN, REGISTERED OFFICE, AUTHORISED AND PAID-UP CAPITAL]
- Founders: [NAMES, SHAREHOLDING, VESTING POSITION]
- Investors: [NAMES, INVESTMENT AMOUNT, CLASS OF SHARES — CCPS / EQUITY, POST-MONEY VALUATION]
- Board: [TOTAL DIRECTORS, INVESTOR NOMINEE RIGHTS, OBSERVER RIGHTS]
- Reserved matters: [LIST OF MATTERS REQUIRING INVESTOR AFFIRMATIVE VOTE]
- Vesting: [CLIFF, VESTING PERIOD, ACCELERATION ON CHANGE OF CONTROL]
- Exit: [QUALIFIED IPO TIMELINE, DRAG-ALONG TRIGGER, PUT OPTION (REGULATORY CAUTION)]

Structure:
1. Definitions and interpretation.
2. Capital structure and issuance — pre-emption, anti-dilution (broad-based weighted average).
3. Board composition, observer rights, quorum, frequency.
4. Reserved matters — shareholder-level and board-level affirmative votes.
5. Transfer restrictions — lock-in, ROFR, ROFO, tag-along, drag-along.
6. Founder obligations — vesting, non-compete, non-solicit (Section 27 Contract Act considerations).
7. Information rights — monthly MIS, audited accounts, budget approval.
8. Exit rights — IPO, strategic sale, put option (FEMA implications for non-resident).
9. Representations and warranties, indemnity, dispute resolution (arbitration seated in [CITY]).
10. Mirror clauses to be incorporated in AOA — Section 6 of Companies Act prevails on conflict.

Anatomy of the Draft

Why the prompt is built the way it is — section by section.

Common Mistakes to Avoid

• ×Put option at assured returns to non-resident investor — violates FEMA NDI pricing.
• ×Post-termination non-compete on founders — unenforceable under Section 27 of Contract Act.
• ×Reserved matters that paralyse day-to-day operations — practical deadlock.
• ×Drag-along without valuation floor or tag protection — founder-hostile and frequently litigated.
• ×SHA not mirrored in AOA — company is not bound; only inter-shareholder remedies survive.

Frequently Asked Questions

Final Thoughts

Negotiate the SHA for economics and control; draft the AOA so the company is actually bound. Keep FEMA in mind for cross-border rounds and Section 27 in mind for founder restraints. A clean SHA closes rounds; a sloppy one closes companies.