Is Shareholder’s Agreement Enforceable in Listed Companies?

Shareholder's Agreement

The operation of a company, the rights and responsibilities granted to the shareholders, and the connection between the company and the shareholders are all described in a shareholders agreement.  
It is a common misconception that shareholder agreements (“SHA’s”) stop functioning when a company is listed on a stock exchange since the company’s shareholding structure changes fundamentally. However, despite being subject to some limitations, the interpretation of the legislation and regulations reveals the opposite. This blog will discuss the shareholder’s agreement and its enforceability in a listed company.

What is a Shareholder’s Agreement? 

An agreement between the company and the shareholders of a company are called a shareholder’s agreement (SHA). SHA has become very popular because it is specifically written to grant specific rights and impose clear restrictions in addition to those that are provided by the Companies Act of 2013 (2013 Act). A shareholder’s agreement is considered a private contract between the shareholders as opposed to the company’s articles of association, a public charter. The rights in an SHA are only effective when the parties hold shares in their respective ownership. 

SHA is typically a by-product of transactions involving the acquisition of shares of one entity by another, where parties, including the Acquirer, execute a shareholder agreement to agree upon covenants, including but not limited to 

(a) Management and Ownership Rights, such as the appointment or removal of directors;

(b) outlining how the company should be run; 

(c) limiting the sale of shares by shareholders and pre-emptive rights; 

(d) protecting minority shareholders and other things. 

As a result, the SHA specifies the rights, duties, and provisions relating to the management and powers of the Company. This agreement serves to safeguard the rights of the shareholders. A shareholder agreement, which is meant to protect all shareholders, is especially crucial for minority shareholders since it explains the responsibility of the majority shareholders to safeguard minority shareholders against exploitation and provide them with a voice when significant decisions are made.

What Is a Listed Company?

According to Section 2 (52) of the Companies Act of 2013, a listed company is one that has any of its securities listed on a recognised stock exchange. Such businesses must abide by the listing criteria of the relevant stock exchanges.

To be listed on a stock exchange in India, such as (NSE) the National Stock Exchange, a company must conduct an initial public offering (IPO). The Bombay Stock Exchange (BSE) is India’s second-most well-known stock exchange.

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Enforceability of Shareholder’s Agreement

A listed Company shall respect the rights of the shareholders that are created by law or via mutual agreements, according to Regulation 4(2)(d)(i) of the SEBI LODR, 2015.

The proviso to Section 58(2) of the Companies Act 2013[1], which states that, when dealing with public companies, “any arrangement or contract between two or more persons with regard to securities transfer shall be enforceable as a contract,” recognises rights established through mutual agreements with regard to the transfer of securities.

According to SEBI and the Companies Act, stakeholder rights, including shareholder rights that are established via mutual agreements, including shareholder agreements, are recognised. As a result, the mere issuing of a public offering of the company’s equity shares does not cause the rights embodied in the Articles of Association and Shareholder’s agreement of a Company to cease to exist. 

It is important to note that SHA clauses that are not included in the AOA may still be enforced against other shareholders but will not bind the company. Later, the Supreme Court adopted a different stance and declared the following in the case of Vodafone International Holdings B.V. vs Union of India:

“We do not agree to the position adopted by this court (in V.B. Rangaraj) that sections of the Shareholders’ Agreement imposing limits are to be authorised only when they are included in the Articles of Association, even where they are consistent with Company legislation. As long as the terms of the Shareholder’s agreement do not conflict with the AoA, the shareholders are free to enter into any arrangement that is in the company’s best interests. Making provisions for proper and efficient internal administration of the business is the primary goal of the SHA. It can envision the company’s best interests on a variety of difficulties and identify various solutions that are not only in the best interests of the shareholders but also for the company”.

There have been instances where certain SHA rights have persisted even after listing, with Jet Airways (India) Limited and Interglobe Aviation Limited being the most noteworthy examples.

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Interglobe Aviation Limited (the “Indigo”) ‘s Promoter Group still has some rights under the shareholder’s agreement outlined in the AoA, even after the company went public.

According to the terms of the AoA and the shareholders’ agreement, which Indigo signed with IGE, Acquire Services, RG group and others who have certain rights as given below:

  • Three directors from the IGE Group and one from the RG Group could be nominated, with one from each group being a non-retiring director. 
  • The IGE Group was also required to nominate the chairman of the Board.
  • Subject to compliance with Indian law, which mandates that any such appointment be approved by the shareholders at a shareholders’ meeting in the case of the Managing Director, and by the Board in the case of the Chief Executive Officer and the President, the IGE Group had the right to nominate and appoint the Managing Director, the Chief Executive Officer, and the President of Indigo.
  • The other group will have the right of first refusal and the tag along right if any member of the RG Group or the IGE Group proposes to sell their shares to a non-affiliated third-party purchaser other than on a stock exchange or through a pre-negotiated sale on a stock exchange.
  • After the first public offering, neither Indigo nor its shareholders nor its Board of Directors may act on the following without first receiving the consent in writing of the directors of the RG Group and the IGE Group.
  • Incorporation or the acquisition of a new subsidiary or affiliate of the company; 
  • Any amendment or restatement of the company’s memorandum or articles of association; 
  • A rights issue by the company; 
  • Transactions between the company or any of its subsidiaries and any shareholder of the company or any of their respective affiliates that are not conducted on an arms-length basis
  • Any change in the number of directors on the company’s Board of Directors.
  • Any change in the composition of the company’s Board of directors; 
  • Any declaration, distribution, or payment of any dividend or other distribution on any equity shares of the company.
  • IGE Group and RG Group could exercise their rights until November 9, 2019, four years after the IPO. The Right of First Refusal (RoFR) terms, however, continued to be enforceable because of disagreements amongst the promoters. As a result, an EGM was summoned after a ruling by the London Court of International Arbitration, and after voting, the abovementioned clause was eliminated.
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As a result, it is clear that some provisions of shareholder agreements may continue to be in effect even after a public offering and that certain shareholders may continue to benefit from the rights they grant. The underlying idea is that any rights that are not available to other shareholders are not allowed to continue after listing, and the shares issued in the IPO shall rank equally with the existing shares.

Frequently updating the Articles of Association

The investee company’s articles of association are frequently changed to reflect the position in SHA. To ensure that none of the SHA’s clauses is deemed ineffective because they conflict with the investee company’s governing documents. A breach of the SHA that does not violate the articles of association is a legitimate corporate activity, but the parties who were aggrieved seek redress for any violation of that agreement under the general law of the land. 

Any provision in the shareholder’s agreement, if not incorporated in the Articles of Association, will be deemed inconsistent and hence void. In a number of situations, Indian judges have ruled that an SHA is null and void if it is not included in the company’s articles. Therefore, the SHA must be properly incorporated into the Articles and not just executed; otherwise, its enforcement may be questioned. Any clause in an SHA that is not included in the Articles shall be regarded as incompatible and void.


Some provisions of shareholder agreements may continue to be in effect even after a public offering. SEBI has suggested several modifications to the current system. It proposes to introduce measures to protect the interests of minority shareholders, including Equitable Treatment, the right to dividend payments, and the ability to participate in share buybacks. It also seeks to strengthen corporate governance at listed entities by allowing shareholders to address various issues, such as the issue of Special rights granted to specific shareholders. 

Also Read: How to Create an Effective Shareholder’s Agreement?

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