What is Shareholders Agreement?
A shareholders agreement is a contractual document entered into among the shareholders of a company to outline their mutual rights, obligations, and duties, particularly concerning the governance, control, and operation of the company.
While the internal structure of companies in Nepal is primarily regulated through the Companies Act 2006, Memorandum of Association, and Articles of Association, the shareholder’s agreement serves as a supplementary mechanism that provides enhanced protections and clarifications not typically included in standard constitutional documents.
In Nepal, shareholder’s agreements are particularly prevalent in companies involving foreign direct investment (FDI) and in entities that have secured capital from private equity or venture capital investors.
However, their application can be equally valuable in start-ups, family-owned businesses, and private limited companies, even though usage in these sectors is relatively limited
For FDI structuring and joint ventures, refer to our comprehensive guide on FDI in Nepal published by Onesphere Law Associates.
Types of Shareholder’s Agreements under Nepalese Law
The Companies Act 2006 recognizes two principal categories of shareholder’s agreements:
1. Consensus Agreement
Defined under Section 187 of the Act, a consensus agreement is one entered into by all shareholders of a private company. It is distinctive in that:
- It is binding on future shareholders;
- It supersedes conflicting provisions of the memorandum and articles;
- It can be executed pre-incorporation and can bind the company upon registration.
Consensus agreements are commonly required in cases of foreign investment, where joint venture agreements are submitted to the Department of Industry or the Office of the Investment Board of Nepal (OIBN).
2. General Shareholders Agreement
This type of agreement may be executed between two or more shareholders of either a public or private company. However:
- It is enforceable only between the contracting parties;
- It does not bind the company or shareholders who are not parties;
- It does not override the articles or memorandum.
In foreign investment transactions, these agreements are often integrated with subscription agreements, forming a unified document referred to as a Shareholder’s and Subscription Agreement or an Investment Agreement.
Key Clauses in Shareholders Agreements
A shareholder’s agreement may vary in complexity depending on the nature of the company and the investment involved. However, several core provisions are typically incorporated:
- Capitalization and future financing rights;
- Board composition, meeting protocols, and quorum rules;
- Special and affirmative voting rights;
- Rights of minority shareholders;
- Share transfer mechanisms and restrictions;
- Non-compete and confidentiality obligations;
- Deadlock resolution mechanisms;
- Exit strategies and termination provisions;
- Boilerplate and governing law clauses.
These provisions help define governance expectations and create structured exit opportunities.
Execution and Formalities under Nepalese Law
Pursuant to the Muluki Civil Code 2017, a shareholder’s agreement must comply with general contract law requirements. Execution must be in writing and signed by the parties, including affixation of a company seal if executed on behalf of a company.
Under Section 187 of the Companies Act, the procedural steps include:
- Filing two copies of the agreement with the company within 15 days of execution.
- The company must submit the agreement to the Office of the Company Registrar (OCR) within 15 days of receiving the agreement.
For pre-incorporation consensus agreements, submission to OCR must accompany the initial company registration application.
Limitations and Enforceability
Although shareholder’s agreements offer robust protection mechanisms, certain limitations must be acknowledged:
- Clauses prejudicial to the company or to minority shareholders may be rendered unenforceable;
- Non-consensus agreements cannot bind the company;
- Provisions that contradict mandatory laws under the Companies Act may be invalid;
- Excessive interference with the statutory powers of the company or its directors could be unlawful.
To mitigate enforceability concerns, key provisions may be embedded in the Articles of Association as entrenched rights.
For compliance-focused legal drafting, consult the Corporate Advisory team at Onesphere Law Associates.
Minority Shareholder’s Protections
A major objective of shareholders agreement is to ensure that minority shareholder’s interests are adequately safeguarded. Common protective clauses include:
1. Board Representation
Minority shareholders may secure the right to appoint a director to the board, which can also be framed as a class right within the Articles.
2. Access to Information
Agreements can specify information rights allowing shareholders access to financial statements, business plans, or any material operational updates.
3. Quorum Requirements
Agreements often impose specific quorum rules requiring the presence of minority appointees to conduct valid meetings. This should be carefully balanced to prevent deadlock, with built-in deadlock resolution mechanisms.
4. Affirmative Rights
Provisions requiring unanimous or special majority consent for certain decisions (e.g., issuance of shares, business sale) provide another protective layer.
Share Transfer Restrictions
Control over the transfer of shares is central to maintaining stability in private companies. Shareholders agreement typically feature one or more of the following:
1. Right of First Refusal (ROFR)
A selling shareholder must first offer their shares to existing shareholders before approaching a third party.
2. Right of First Offer (ROFO)
Here, existing shareholders are given the opportunity to purchase shares before the seller can offer them to outsiders.
3. Tag-Along Rights
These ensure that if a majority shareholder exits, minority shareholders can sell their stake on the same terms.
4. Drag-Along Rights
Majority shareholders may compel minority shareholders to sell their shares during a third-party acquisition, ensuring full control transfer.
Caution: Drag-along right’s enforceability in Nepal remains legally untested, particularly regarding the issuance of specific performance orders by courts.
Governing Law and Dispute Resolution Mechanisms
Shareholder’s agreements may be governed by Nepalese law or a foreign law, subject to Section 709 of the Muluki Civil Code. Cross-border agreements, especially those involving foreign investors, frequently adopt English law or Singaporean law for governing clauses.
Dispute Resolution
Disputes may be resolved either through:
- Civil litigation in Nepalese courts; or
- Arbitration, either domestic or international.
Careful drafting of arbitration clauses is essential to:
- Avoid jurisdictional confusion between District Courts and High Courts;
- Enable emergency injunctive relief from courts;
- Ensure impartial and swift appointment of arbitrators.
The Arbitration Act 1999 supports both institutional and ad hoc arbitration mechanisms.
Conclusion
A well-drafted shareholder’s agreement is not merely a contractual document; it is a strategic governance instrument. Whether facilitating foreign investments, protecting minority interests, or managing business partnerships, shareholder’s agreements play a pivotal role in safeguarding long-term interests of stakeholders in Nepal.
Given the evolving legal landscape, it is highly advisable to consult specialized legal counsel to tailor shareholders agreement in compliance with Nepalese corporate laws while aligning with the commercial intent of the parties involved.
Need Assistance?
For expert legal guidance on drafting and enforcing shareholder’s agreements in Nepal, contact Onesphere Law Associates.