A shareholders agreement or a stockholder agreement is a legal document amongst the shareholders that defines how the company should operate and the rights and obligations of the shareholders. A shareholders agreement protects all the rights of a shareholder in the company.
A shareholders agreement is made with the motive of protecting both, the investors and the business. It can also be a benefit for the minority shareholders of a company who have limited powers in the company.
It is advised to draft a shareholders’ agreement at the starting of a business, or while issuing the initial shares of the company. It helps to reach a common ground concerning what should the shareholders expect from the business and also, what should they do in return for the business. This agreement helps to settle down the differences between the investors. However, a shareholders agreement is optional.
The contents of a shareholders’ agreement differ from case to case. The nature of the shareholders' agreement depends on the nature of the business being conducted, the class of shares, and many other factors. However, there are certain basic components which are mentioned in all the shareholders' agreement such as the number of shares issued, percentage of ownership, the date when the shares were issued, etc. A shareholders agreement also contains the details about the payment of dividends to the shareholder and the distribution of earnings. It also determines the selling and transferring of shares to any third party. Many shareholders' agreements include a clause for competition restriction, this prevents the shareholder from competing against the company. For example, the shareholders may be restricted from practicing business with another rival firm in the same geographical area. This protects the interest of the business and other shareholders as well. There is another component to the shareholders' agreement that is the deed of adherence, which implies that the new shareholders would adhere to the pre-existing shareholders' agreements.
A shareholders agreement also acts as a protection tool for the minority shareholders of a company. Minority shareholders are those that have less than 50% of shares or ownership of the company and are often at risk of being discriminated against by the majority shareholders. It is usually the majority shareholders that have more say and voting rights, this may at times go against the interest of the minority, therefore there are provisions made in the shareholders' agreement concerning taking consent and votes of the minority shareholders as well concerning certain decisions.
Another provision in the shareholders' agreement that protects the interest of the minority shareholders is the tag-along provision. The tag-along provision does not allow the majority shareholders to sell the shares when an offer is made unless the same offer is made to the minority shareholders as well.
Thus a shareholders agreement is a legal document, though optional, that helps to lay down the common ground rules of how the company will function, and the rights of the shareholders. This also protects the interest of the minority shareholders in a company by including provisions like the tag-along clause, therefore helps in avoiding disputes amongst the majority and the minority shareholders as well.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.