These agreements are written
for the day the parties disagree.

Control is usually expressed twice, through the board and through consent rights. Board composition sets who appoints how many directors, whether an investor gets a nominee or only an observer, and whether the nominee’s presence is required for quorum, which is a quiet but powerful veto. The chair’s casting vote, alternate director rights and notice periods belong in the same conversation. Reserved matters sit above the board: a defined list of decisions that cannot be taken without specified consent, at board level, at shareholder level, or both. Whether consent is needed from a named investor or from a percentage of a class also decides how the right survives a later funding round, and that is rarely thought about at the time it is drafted.

Reserved matter lists tend to grow during negotiation and lose their usefulness as they grow. A short list gives real protection. Extend it into ordinary operations and every routine matter becomes a consent request, which in a two-shareholder company manufactures deadlock.

The relationship between the agreement and the articles is a significant technical issue in this area. The agreement binds those who sign it. The articles bind the company and its members from time to time, including future transferees, and they are what a registrar, a tribunal or an incoming shareholder will look at. Provisions meant to operate against the company or against later holders are therefore generally reflected in the articles, adopted by special resolution under Section 14 of the Companies Act, 2013. Two further constraints matter. Under Section 6 of the Companies Act, 2013 the Act prevails over the memorandum, the articles and any agreement, and the effect on a particular term depends on whether that term is inconsistent with the Act. Transfer restrictions also sit differently depending on the form of company. Shares of a public company are, subject to the statutory framework, freely transferable, while a private company is defined in part by restrictions on transfer in its articles. Contractual restrictions between shareholders of a public company have been litigated at length and the position remains contested.

One related point is easily missed. A nominee director’s duties under Section 166 of the Companies Act, 2013 are owed to the company, which limits the extent to which the director can act on the instructions of the appointing shareholder. Substantive protective rights therefore sit better as shareholder consent items than as board vetoes exercised through a nominee.

Investors expect protection against being diluted, and against being diluted at a price below the one they paid. The first is pre-emption on new issues, which reflects the statutory right of existing shareholders on a further issue of share capital under Section 62 of the Companies Act, 2013, subject to the exceptions in that section and the rules made under it, and is extended by contract to instruments and situations the section does not reach. The second is anti-dilution proper, triggered by an issue below the investor’s subscription price. A full ratchet resets the investor’s effective price to the lower price and is severe on founders, since the whole of the down round is corrected at their expense. A broad-based weighted average adjustment reflects the size of the down round as well as its price, and is the more common negotiated position. The difference between the two becomes visible only in the numbers.

Implementing anti-dilution in India needs a mechanism as well as a formula. The adjustment is typically effected by altering the conversion ratio of compulsorily convertible preference shares or debentures held by the investor, rather than by issuing shares at a nominal price, because pricing conditions apply where the investor is non-resident and because the Companies Act, 2013 restricts the issue of shares at a discount.

Which issues trigger the adjustment and which do not is a drafting point in itself. Employee stock options and conversions of existing instruments are usually carved out.

Transfer provisions control who can join the register and on what terms. A lock-in prevents transfers for a defined period. Pre-emption gives existing shareholders first call, either as a right of first refusal exercisable once a third-party offer is in hand or as a right of first offer requiring the seller to approach them first. Tag-along protects a minority by allowing it to join a sale by a controlling holder on the same terms, so the majority cannot sell control and leave the minority with a partner it did not choose. Permitted transfers to affiliates are usually excluded from all of this, subject to the transferee adhering to the agreement.

Drag-along runs the other way, compelling a minority to sell when holders above a specified threshold accept an offer. Its drafting decides whether it is workable: the threshold that triggers it, whether a minimum price applies, what warranties dragged holders must give and whether their liability is capped at their share of the proceeds, and how drag interacts with tag when both could apply.

Deadlock provisions are the part of the agreement most often left as boilerplate. They define what deadlock is, provide for escalation to senior representatives outside the board with a fixed period for it, and only then reach for a separation mechanism.

Exit is why financial investors are in the document at all, and the mechanics have to be realistic. The common routes are a listing, a trade sale supported by drag rights, a buy-back, and a put option against the promoters or the company. Where the investor is non-resident, optionality is permitted under the Non-debt Instruments Rules, 2019 subject to the lock-in and pricing conditions attached to it, and an assured exit price is not. The valuation mechanism therefore does most of the work, and it specifies the methodology, who appoints the valuer, and what follows if a party refuses to cooperate. On breach, specific performance and injunctions under the Specific Relief Act, 1963 are usually more useful than damages, because the shareholder generally wants the transfer stopped rather than compensated for. The company is made a party for the same reason, so that it can be restrained from registering an offending transfer while the argument about whether the transfer was permitted is still running.

A remedy that arrives after the shares have been registered in somebody else’s name is a poor substitute for one that arrives before.

A joint venture adds the question of what each partner contributes and on what basis. Assets, intellectual property, personnel and customer relationships are usually licensed or seconded in rather than transferred outright, and the terms on which they come back when the venture ends are settled at the outset. Restrictions on partners competing with the venture need care under Section 27 of the Indian Contract Act, 1872 and under the Competition Act, 2002. Where relations fail entirely, minority shareholders may seek relief against oppression and mismanagement before the National Company Law Tribunal under Sections 241 and 242 of the Companies Act, 2013, and eligibility to petition is governed by Section 244.