| Authored by R & D Law Chambers LLPRavish Bhatt | Advocate, Bar Council of Gujarat (G/504/2008) | Dual-qualified lawyer (India and England & Wales) | ADIT, CIOT, LondonPublished: 10 October 2026 | Last reviewed: 10 October 2026 |
| Scope. This article is written against the Companies Act, 2013 and the Indian Contract Act, 1872 as in force on the date of publication, and addresses shareholders’ agreements in private companies incorporated in India. It does not address listed company governance, and it is not advice on any particular agreement. |
| A shareholders’ agreement binds the people who sign it. The articles of association bind the company and everyone who later becomes a member. Where the two diverge, the Supreme Court held in V.B. Rangaraj that a restriction outside the articles binds neither the company nor the shareholders. The amendment that cures this is itself a special resolution, and the majority shareholder who needs it frequently cannot pass it alone. |
Index of Topics
- The agreement binds the signatories; the articles bind the company
- Count the votes before drafting the control clauses
- A majority does not need veto rights; it needs the minority not to vote against
- The power of attorney is displaced the moment the shareholder turns up
- Tag-along without drag-along is a concession given for nothing
- Where equity is issued for involvement, only a leaver clause recovers it
- Valuation is a drafting decision, not a mechanical one
- Related party transactions: consent recorded now, or a petition later
- Restrictive covenants survive only on the terms section 27 allows
1. The agreement binds the signatories; the articles bind the company
| Section 10(1) of the Companies Act, 2013 makes the memorandum and articles bind the company and its members as if each had signed them. A shareholders’ agreement binds only its parties. In V.B. Rangaraj the Supreme Court held that a share transfer restriction agreed between shareholders but absent from the articles bound neither. |
In V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160, members of a private company agreed that a shareholder would sell only within his own branch of the family. The articles contained no such restriction. The Court held that “A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders.” Note the breadth of that formulation. It does not stop at the company.
The Delhi High Court applied it to governance rather than transfer in World Phone India Pvt. Ltd. v. WPI Group Inc., USA, decided 15 March 2013, where a shareholder sought to enforce an affirmative vote conferred by the agreement but missing from the articles. The Court held that “Unless the AoA was actually amended, WPIGI could not insist on exercise of the affirmative vote.”
A competing line of authority distinguishes Rangaraj where the articles are silent rather than contradictory, and the question is not settled. The drafting answer does not require it to be. If the provision matters, it goes into the articles, and the uncertainty never arises.
| Shareholders’ agreement | Articles of association | |
|---|---|---|
| Binds | Only the signatories | The company and every member, present and future, under section 10(1) |
| Amended by | Consent of the parties | Special resolution under section 14(1) |
| Public | Confidential | Filed and publicly inspectable |
| Enforced | As a contract | As the company’s constitution |
2. Count the votes before drafting the control clauses
| Section 114(1) carries an ordinary resolution where the votes in favour exceed the votes against. Section 114(2) requires, for a special resolution, that the votes in favour be not less than three times the votes cast against. Section 14(1) makes any alteration of the articles a special resolution. A two-thirds holder therefore cannot alter the articles over opposition. |
This is the trap in almost every majority-minority agreement. The agreement contains a clause obliging the parties to amend the articles so as to give effect to it. The amendment is a special resolution. The person whose vote is needed to pass it is the person the amendment exists to bind.
Entrenchment under section 5(3) is worth considering for provisions that must not be unpicked, but section 5(4) permits it by amendment in a private company only where all the members agree. A minority holder therefore has an absolute veto over entrenchment, which makes it a provision to seek at incorporation rather than afterwards.
| Holding | What it carries |
|---|---|
| Above 50 per cent | Ordinary resolutions. Appointment and removal of directors, adoption of accounts, ordinary borrowing |
| Two-thirds | Ordinary resolutions only. Not an alteration of the articles, a preferential allotment, a reduction of capital or a voluntary winding up |
| More than 25 per cent | Blocks every special resolution, for as long as the holding is retained and the holder votes against |
| Every member | Required for entrenchment of articles in a private company under section 5(4) |
3. A majority does not need veto rights; it needs the minority not to vote against
| Section 114(2) measures votes cast against, not shareholding. The words “if any” mean that where no vote is cast against, the three-to-one ratio is satisfied. The covenant a majority shareholder needs is therefore not a promise to vote in favour, but a promise not to vote against, which abstention satisfies. |
Affirmative or veto rights are a minority instrument. A shareholder holding more than half has no use for them, and drafting a list of matters requiring unanimity, which is what most precedent agreements contain, hands the minority a veto it did not ask for.
What a majority needs instead is a voting covenant drawn to the words of section 114(2) rather than to the shorthand. A covenant obliging the shareholder to attend and vote in favour compels a positive act and is correspondingly harder to enforce. A covenant that she will either vote in favour or absent herself, and will in no event vote against, reaches the same statutory result and makes a breach far easier to prove.
Two points follow. Reserved matters should carry thresholds set against projected turnover rather than against share capital, because a company with small capital and large contracts will otherwise route everything through its shareholder. And the covenant needs a consequence inside the agreement, because specific performance of a voting obligation on the morning of a meeting is not a practical remedy.
4. The power of attorney is displaced the moment the shareholder turns up
| A power of attorney coupled with an interest is irrevocable while the interest subsists, and is not a proxy that lapses meeting by meeting. But an attorney acts in the principal’s place, not alongside her. If the shareholder attends and votes, that is the vote the company records. |
Agreements frequently require the minority shareholder to execute a power of attorney authorising the majority to vote her shares in accordance with the agreement. The instrument is useful, but it is routinely asked to do work it cannot do.
It is not a proxy. A proxy under section 105 is appointed to vote at a particular meeting and may be required to be deposited up to forty eight hours beforehand, so a majority relying on a fresh proxy before each meeting relies on the signature it is least likely to get. A power coupled with an interest is a standing authority.
What it cannot do is beat the principal’s own act. It answers absence and inaction, not opposition. Its most valuable limb is therefore not voting but the authority to execute an instrument of transfer where the agreement requires one and the shareholder will not sign, which is what converts a call option from a cause of action into a remedy.
5. Tag-along without drag-along is a concession given for nothing
| A tag-along lets the minority join the majority’s sale on the same terms. A drag-along compels it to. Agreements that contain the first without the second allow a purchaser who wants the whole company, but not the minority stake, to block the majority’s own exit. |
The two provisions are a matched pair and are usually negotiated together. Where only the tag survives, and the clause provides that the majority may not complete if the buyer declines to take the minority’s shares, the minority acquires a blocking position over an exit it has not paid for.
Three points make a drag defensible rather than merely effective. The price per share and the terms must be identical to the majority’s own. The minority should warrant title to its own shares and nothing else. And any amount the majority receives beyond the price per share, whether called a fee, a consultancy, a non-compete payment or an earn-out, should count as part of the consideration and adjust the minority’s price. Without that, the clause invites a petition rather than a completion.
6. Where equity is issued for involvement, only a leaver clause recovers it
| Where a shareholder receives equity because of what a person will do rather than what the shareholder has paid, nothing in company law recovers that equity if the person stops. A call option exercisable on defined leaver events is the only mechanism that does. |
It is missing precisely where it matters most: where one party takes the majority and the operating party takes a minority stake at or near par, on the shared understanding that the operating party will run the business.
A workable clause names the events, distinguishes between them on price, and ties the trigger to the person rather than the holder where those differ. Death and incapacity ordinarily carry full value; breach, insolvency and conviction ordinarily do not, and a price expressed as the lower of fair value and the amount subscribed is common, although its tax consequences for both sides should be taken first. The option must be supported by the transfer machinery in section 4, or it depends on the cooperation of the person being bought out.
A put option, which runs the other way and gives the minority an exit, raises a separate set of questions under Indian law, which are addressed in our article on the enforceability of put option clauses in shareholders’ agreements.
7. Valuation is a drafting decision, not a mechanical one
| Section 247 requires a valuation under the Companies Act, 2013 to be made by a registered valuer, who must be impartial and must not value assets in which he has an interest. Who appoints the valuer, and on what method he values, decide the number more than his professional judgment does. |
Most agreements say the shares will be valued at fair value by an independent expert and stop there. Three questions remain, and each changes the answer.
Who appoints. A clause providing that the parties will agree, failing which the majority’s nominee is taken, means the majority appoints every time, because the minority can avoid that only by agreeing to the majority’s candidate. A determination by an expert chosen by the acquiring party is weaker evidence of value, and a clause making it final and binding is correspondingly harder to defend. Section 247(2) requires impartiality and bars a valuer from valuing assets in which he has a direct or indirect interest.
On what method. Where a company owns its plant and premises, net asset value and earnings produce comparable figures. Where it leases everything it uses, which is common when a group holds the assets and the operating company holds the contracts, net asset value produces almost nothing while a discounted cash flow produces a large figure driven entirely by projections. Naming the method therefore allocates value, and if a discounted cash flow is chosen, the agreement should name whose projections it runs on.
For what purpose. A valuation feeding a preferential allotment under section 62(1)(c) must in any event be by a registered valuer’s report. Drafting the contractual valuation so that it can also serve the statutory one saves doing it twice.
8. Related party transactions: consent recorded now, or a petition later
| Where a company transacts with its own controlling shareholder, those transactions are the most likely subject of a later minority petition. Clause-level consent recorded in the agreement, naming each arrangement, is what makes them difficult to attack. A consent to unidentified future transactions is worth nothing. |
A joint venture company commonly leases plant from its majority shareholder, licenses its brand, buys back-office services from it and is funded by it. Each is a related party transaction. Sections 184 and 188 govern disclosure and approval, and where the shareholder is a listed public company, section 177(4)(iv) places approval of related party transactions within the terms of reference of its audit committee. That requirement is independent of section 188, so it reaches even a transaction in the ordinary course and at arm’s length, and the exemption for wholly owned subsidiaries does not assist a company that is majority but not wholly owned.
The drafting point is specificity. A clause listing each arrangement, recording that its terms were disclosed and that the minority consents, is a record of informed consent. A clause consenting in advance to transactions that are not described turns that record into evidence that nothing was informed. Where flexibility is needed, the answer is a standard rather than a blank: a further arrangement qualifies if it is on terms no less favourable to the company than arm’s length, notice of its material terms is given, and the statutory approvals are taken first.
No drafting removes the statutory right to apply to the National Company Law Tribunal, and a clause purporting to do so would be void and would suggest the arrangements needed hiding. What good drafting does is narrow the grounds. The remedies available to a minority shareholder are addressed in our article on legal remedies for minority shareholders in oppression and mismanagement cases.
9. Restrictive covenants survive only on the terms section 27 allows
| Section 27 of the Indian Contract Act, 1872 makes every agreement restraining a person from exercising a lawful profession, trade or business void to that extent. Indian law applies no general reasonableness test to post-termination restraints, so shortening the period does not save a covenant that is a restraint of trade. |
The distinction that works is between a restraint operating while the relationship subsists and one operating after it ends. In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 SCC 227, the Supreme Court held that a negative covenant operating during the term of the agreement “may be valid and enforceable”, but that “the moment it is sought to be enforced beyond the term and expiry of the agreement, it becomes prima facie void”. The Court recorded that these were prima facie findings on an interim application, and confirmed, citing Gujarat Bottling Co. Ltd. v. Coca Cola Co., that the doctrine is not confined to employment contracts.
Two consequences for drafting. A restraint expressed to run for so long as the shareholder holds shares is in-term, needs no stated period, and stands on the strongest available footing. A restraint running after she ceases to hold them is post-term, and should be confined to solicitation of identifiable customers, employees and suppliers rather than drawn so widely that it prevents working in the sector, in which case it will be treated as a non-compete and fall with one.
Exception 1 to section 27 saves an agreement by one who sells the goodwill of a business not to carry on a similar business within specified local limits, so long as the buyer carries on a like business there and the limits appear reasonable to the court. The exception attaches to the seller. Where a business is bought from a company and equity is issued to an individual connected with it, that individual is not the seller, and a covenant from him does not sit within the exception merely because the agreement recites a connection. The stronger covenant is the one taken from the selling entity, and it is routinely overlooked because that entity is not a party to the shareholders’ agreement.
Frequently Asked Questions
Does a shareholders’ agreement override the articles of association?
No. The articles bind the company and its members under section 10(1) of the Companies Act, 2013. The agreement binds only its parties. In V.B. Rangaraj v. V.B. Gopalakrishnan the Supreme Court held that a restriction outside the articles was binding neither on the company nor on the shareholders. Where a provision matters, it should be carried into the articles by special resolution.
Can a shareholder holding two-thirds of the capital amend the articles?
Not over opposition. Section 14(1) makes an alteration of the articles a special resolution, and section 114(2) requires the votes in favour to be not less than three times the votes cast against. A holder of two-thirds facing a minority that votes against cannot meet that ratio.
Are voting agreements between shareholders enforceable in India?
As between the shareholders who sign them, a voting covenant is a contract. What it cannot do by itself is bind the company, which is the point decided in World Phone India Pvt. Ltd. v. WPI Group Inc. A covenant intended to control how the company acts should be mirrored into the articles.
What is the difference between a tag-along and a drag-along right?
A tag-along permits a minority shareholder to join a sale by the majority on the same terms. A drag-along permits the majority to compel the minority to sell on those terms. An agreement containing a tag without a drag allows a purchaser unwilling to take the minority stake to block the majority’s own exit.
Is a non-compete clause in a shareholders’ agreement enforceable in India?
A restraint operating while the shareholder holds shares stands on a different footing from one operating after she ceases to. In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan the Supreme Court observed that a covenant sought to be enforced beyond the term of the agreement becomes prima facie void under section 27 of the Indian Contract Act, 1872.
Who should appoint the valuer under a shareholders’ agreement?
Section 247 of the Companies Act, 2013 requires a valuation under that Act to be made by a registered valuer who must be impartial. A clause under which the acquiring shareholder appoints the valuer whenever the parties disagree produces a determination that is weaker evidence of value and harder to uphold as final and binding.
How R & D Law Chambers Works on These Matters
The practice advises on shareholders’ agreements and joint venture documentation for Indian private companies, including the control and transfer provisions discussed above, the corresponding amendments to the articles of association, related party arrangements between a company and its controlling shareholder, and the restrictive covenants that accompany them.
Where those arrangements are disputed, the practice also acts in shareholder and joint venture disputes and in proceedings before the National Company Law Tribunal.
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| Disclaimer. This article is published for information only. It is not legal advice and should not be relied upon as such. The law stated is as on 10 October 2026 and may change. Professional advice should be taken on any specific agreement or transaction. |