Two friends start a company together, split shares 50/50, and never sign a shareholders’ agreement because “we trust each other.” Then one wants to exit, or bring in a new investor, or simply stops showing up — and there’s no document governing what happens next. This is one of the most common and most preventable disputes among Pakistani startups and family businesses.

1️⃣ What a Shareholders’ Agreement Does

While the Companies Act 2017 and a company’s Articles of Association set out baseline rules, a shareholders’ agreement is a private contract between the shareholders themselves that governs matters the law leaves to negotiation, including:

• How shares can be transferred, and to whom.
• What happens if a shareholder wants to exit, dies, or becomes incapacitated.
• Decision-making thresholds for major matters, such as raising funds, taking on debt, or selling the company.
• Dividend policy and reinvestment of profits.

2️⃣ Clauses That Prevent the Most Common Disputes

1. Vesting schedule — shares earned over time, so a co-founder who leaves early doesn’t walk away with a full stake.
2. Right of first refusal — existing shareholders get the first opportunity to buy shares before they’re offered to outsiders.
3. Drag-along and tag-along rights — protect minority and majority shareholders when the company is sold.
4. Deadlock resolution — a mechanism, such as mediation or a casting vote, for when shareholders are equally split on a decision.
5. Non-compete and confidentiality — preventing a departing shareholder from starting a competing business using company information.

✅ Practical example: Two co-founders of a Lahore-based startup split equity equally with no vesting schedule. One co-founder left after eight months to join another company, but retained his full 50% stake indefinitely — leaving the remaining founder to run the business while sharing ownership permanently with someone no longer contributing. A vesting clause would have limited his stake to what he had actually earned.

3️⃣ Shareholders’ Agreement vs Articles of Association

• The Articles of Association are filed with SECP and are publicly accessible, governing the company’s formal structure.
• The Shareholders’ Agreement is a private document between shareholders, not filed publicly, allowing more commercially sensitive or flexible terms.
• Where the two conflict, courts generally look to which document governs the specific issue in dispute — which is why consistency between them matters.

💡 Practical Tips

• Draft a shareholders’ agreement at formation, not after a dispute arises — once trust breaks down, agreement on terms becomes far harder.
• Include a vesting schedule even among co-founders who are close friends or family.
• Revisit the agreement whenever new investors or shareholders join — outdated agreements create gaps.
• Have a lawyer review the agreement against your Articles of Association to ensure consistency.

Need Legal Assistance?

HSJ Legal, led by Advocate Hina Saleem Jessani (High Court Advocate, Karachi), drafts shareholders’ agreements and advises startups and family businesses on founder and investor arrangements.

📞 Get in touch with us today before you bring on a co-founder or investor.