Why Shareholders’ Agreements are not as binding as Founders think

One of the biggest misconceptions in the startup ecosystem is that once a Shareholders’ Agreement (SHA) is signed, everything becomes absolute.

Founders often assume:

• every clause will always be enforceable,
• every right will operate exactly as drafted,
• and every dispute will automatically get resolved through the contractual framework.

Reality is far more nuanced.

A Shareholders’ Agreement is an important commercial and legal document. It defines rights, obligations, governance structures, investor protections, transfer mechanics, and dispute resolution processes. However, in practice, SHAs operate within a larger framework of:

• company law,
• regulatory oversight,
• judicial interpretation,
• public policy considerations,
• and practical enforceability.

This distinction becomes extremely visible during founder-investor disputes. Perhaps one of the most important examples from the Indian startup ecosystem is the long-running dispute involving Anupam Mittal and investor WestBridge Capital in the parent entity of Shaadi.com.

The Shaadi.com - WestBridge Dispute: A Case Study in SHA Complexity

Back in 2006, WestBridge invested approximately ₹166 crore into People Interactive, the parent company of Shaadi.com. As part of the investment, the parties entered into a Shareholders’ Agreement containing detailed investor rights, including IPO obligations, redemption rights, drag-along provisions, and arbitration clauses.

On paper, the structure looked straightforward.

The SHA provided that if the company failed to achieve an IPO within a specified timeline, WestBridge would have the right to seek an exit through mechanisms including buybacks and drag-along rights. The agreement also specified arbitration in Singapore under ICC rules.

However, when the relationship between the parties deteriorated years later, the dispute moved beyond pure contract enforcement. This is where the real complexity emerged.

Anupam Mittal initiated oppression and mismanagement proceedings before the NCLT in India, arguing that the dispute involved shareholder oppression issues under Indian company law. WestBridge, meanwhile, sought enforcement of the arbitration provisions through Singapore courts, relying on the SHA.

What followed became a multi-jurisdictional dispute spanning:

• Singapore courts,
• Indian courts,
• arbitration proceedings,
• and NCLT litigation.

The key takeaway was profound:

Even though the SHA contained a valid arbitration clause, Indian courts still examined whether certain disputes particularly oppression and mismanagement matters were arbitrable at all under Indian law.

This highlights an important principle founders and investors often miss:

A contractual clause does not automatically override statutory remedies.

The Byju’s Investor Disputes: When Governance Becomes the Core Issue

Another important example from the Indian startup ecosystem is the ongoing governance and investor disputes surrounding Byju's.

At its peak, Byju’s was one of India’s most valuable startups, backed by marquee investors including:

• Prosus
• Peak XV Partners
• General Atlantic
• Chan Zuckerberg Initiative

As operational stress increased, investor-founder disagreements gradually shifted from business performance to governance rights, transparency obligations, and board oversight.

Investors raised concerns around:

• delayed financial filings,
• audit issues,
• debt obligations,
• governance transparency,
• and management decisions.

Over time, disputes escalated into extraordinary general meeting (EGM) attempts, founder removal discussions, litigation, and regulatory scrutiny. What makes the Byju’s situation particularly instructive is that the company already had sophisticated investment documentation, institutional investors, board structures, and shareholder rights in place.

Yet, once trust deteriorated, the dispute moved beyond contractual drafting into broader governance conflict. This is a very important insight for founders - An SHA can define governance rights. It cannot manufacture governance trust. Once transparency breaks down, parties begin relying less on relationship dynamics and more on technical enforcement of rights.

At that stage:

• board rights become weapons,
• information rights become pressure tools,
• and governance clauses become battlegrounds.

In venture-backed companies, governance disputes often intensify when external pressures increase simultaneously:

• valuation compression,
• debt obligations,
• operational slowdown,
• and delayed liquidity events.

Under stress, even carefully negotiated shareholder arrangements can become highly contentious.

The Difference Between Commercial Rights and Statutory Rights

Most SHAs are built around commercial arrangements.

These include:

• liquidation preference,
• anti-dilution rights,
• transfer restrictions,
• reserved matters,
• drag/tag rights,
• and board control mechanisms.

In normal operating conditions, these clauses function relatively smoothly.

But once disputes escalate into areas involving:

• oppression and mismanagement,
• fiduciary duties,
• minority shareholder protection,
• fraud,
• public policy,
• or statutory company law rights,

courts often examine whether contractual provisions can fully govern those issues. This is why many founder-investor disputes ultimately move outside the neat boundaries of the SHA itself.

Btw, you can find our standard term sheet and SSHA on our website here.

Why Enforcement becomes complicated in practice

Founders often underestimate how difficult enforcement can become even when clauses appear airtight. Take drag-along rights as an example.

On paper, drag rights may allow majority investors to force minority shareholders into a sale under certain conditions.

But practical enforcement depends on:

• valuation disputes,
• allegations of unfair conduct,
• fiduciary obligations of directors,
• regulatory approvals,
• and judicial interpretation of fairness.

Similarly, arbitration clauses may exist, but courts may still intervene where:

• statutory remedies are involved,
• allegations of oppression arise,
• or enforcement conflicts with local public policy.

The Shaadi.com matter became significant precisely because it tested the interaction between:

• arbitration agreements,
• Indian company law remedies,
• and cross-border enforceability.

Power Dynamics often matter more than drafting

One thing startup ecosystems rarely discuss openly is that SHAs are not enforced in a vacuum. Power dynamics matter enormously.

A founder with:

• strong market position,
• operational control,
• customer influence,
• and ecosystem goodwill

often negotiates disputes differently from a distressed founder with limited leverage.

Similarly, large institutional investors may avoid aggressively enforcing certain rights if:

• reputational risks emerge,
• future founder relationships are impacted,
• or litigation becomes commercially inefficient.

This is why many disputes ultimately settle commercially despite highly detailed SHA documentation. The agreement provides leverage. It does not guarantee outcomes.

The Malpani Ventures Perspective

At Malpani Ventures, we believe legal documentation matters enormously. Clear governance structures, transparent rights, and aligned incentives are essential in venture investing. We also recognize that startups are long-term partnerships, not merely legal constructs.

An SHA cannot substitute:

• trust,
• communication,
• or alignment of vision.

The strongest founder-investor relationships are built not just on enforceable clauses, but on shared long-term thinking. Ultimately, litigation is rarely a sign that the document failed. More often, it signals that the relationship already had.

Founders should absolutely understand and negotiate their SHA carefully. Every clause matters.

The Indian startup ecosystem has repeatedly shown that once relationships break down, disputes often move beyond contracts and into broader questions of fairness, control, and statutory rights.