What Is a Shareholders' Agreement? Purpose, Key Provisions, Differences from the Investment Agreement, and Post-Signing Operation

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

At startups raising a Series A round, the team must scrutinize the investment agreement and shareholders' agreement presented by the investors. Founders and legal staff need to understand what constraints the proposed provisions will place on the future management of the company. If the company proceeds to signing without properly reviewing the contractual provisions, this may cause serious obstacles to later business development and fundraising.

A shareholders' agreement is a contract that, when a startup raises funds from investors, sets out the post-investment management structure and the rights and obligations among the shareholders, and continuously governs day-to-day management, governance and operational practice. While the investment agreement serves to complete the transaction procedures, the shareholders' agreement binds the company and its shareholders over a long period after signing.

Definition and Purpose of a Shareholders' Agreement

A shareholders' agreement is an agreement entered into among the issuing company, existing shareholders such as the founders, and the investors newly coming in. When new shareholders join through a financing, the balance of voting power at the general meeting of shareholders shifts, and the company's governance structure also changes significantly. Management must respect the investors' wishes while still securing enough freedom in decision-making to grow the business smoothly. A shareholders' agreement is prepared to maintain this balance of rights and obligations among multiple parties.

When the company issues share options, changes its officers, disposes of material assets, or convenes a board meeting, management checks the contractual provisions each time. If this check is neglected, the relationship of trust with the investors may be affected through a breach of matters requiring prior approval or a failure to perform a notice obligation.

The conduct subject to these rules is wide-ranging and extends to day-to-day business execution. The issuance of new shares or share options, the disposal of material assets, and changes of officers are matters that directly affect the company's capital structure and control. Management is required to act with these provisions constantly in mind in the course of day-to-day business execution.

Grounds for termination of a shareholders' agreement are sometimes conditioned on an initial public offering (IPO), a decline in an investor's shareholding ratio, or the departure of a particular party. To comply with what has been agreed, it is necessary to decide concretely at the time of signing who will carry out which tasks. If no one has been assigned to prepare the monthly materials or to request approvals, the agreed terms cannot be translated into day-to-day operations.

If you would like to review the Series A investment agreement, shareholders' agreement and the terms of the class shares together, our firm's Startup Legal and Fundraising Support provides review of contractual provisions and support in designing operational practice.

Differences from the Investment Agreement

Although the investment agreement and the shareholders' agreement are often signed in the same Series A round, their roles are clearly distinct. The investment agreement is the "entry contract" that completes the one-off transaction procedure of the financing, whereas the shareholders' agreement functions as a contract governing the ongoing relationship after the investment is made. Without a correct understanding of the difference in nature between the two agreements, one may misjudge which provisions should be included in each.

The investment agreement is designed as a contract that sets out the conditions precedent to the subscription and payment for new shares, representations and warranties, closing procedures, and the like. Once the investor pays the funds to the issuing company and the company issues shares to the investor, completing the transaction procedures, many of the core obligations borne by the investment agreement have been performed. The investment agreement is thus characterized by its principal role of governing the execution of the transaction itself and bringing it safely to closing.

That said, the effect of the investment agreement does not necessarily cease entirely upon closing. Provisions that survive the completion of the transaction are included, such as liability for breach of representations and warranties and claims for damages based on breach of contract. If the representations and warranties made by the issuing company or the management shareholders at the time of signing the investment agreement prove to be inaccurate, the investor can pursue contractual liability even after the transaction has been executed. Accordingly, while the investment agreement is principally directed at a one-off transaction, it retains provisions on after-the-fact remedies.

By contrast, the shareholders' agreement is an agreement that continuously governs day-to-day management, governance and monthly operational practice after signing. Even from the month following the completion of the investment, the contractual relationship continues for as long as the company's business activities continue, covering the holding of board meetings, the disclosure of financial statements and related documents, the obtaining of approval for matters requiring prior approval, and so on. The term of the agreement is confirmed through the termination clause of each agreement, but the fundamental difference lies in the fact that it continues to govern management over a long period until the company achieves an initial public offering (IPO).

Provisions on share purchase demands and damages placed toward the end of the agreement sometimes have similar counterparts in the investment agreement. If the two agreements differ in the requirements for damages to arise, the scope of compensation, or the wording of the grounds for a share purchase, there is a risk that the standard for exercising rights will become unclear when a dispute arises. Even where the two agreements are prepared as separate documents, it is necessary to check across them for overlaps and inconsistencies.

The specific review items for the investment agreement itself and an overview of the transaction procedures are explained in detail in What Is an Investment Agreement?.

Key Provisions on Governance and Information Rights

In the governance provisions of a shareholders' agreement, the parties choose whether to grant the lead investor the right to nominate a director or to limit it to the right to nominate an observer. The obligations under the Companies Act and the practical burden differ significantly depending on whether the investor seeks to participate directly in the issuing company's management or limits itself to monitoring through attendance at meetings.

Where a director nomination right is granted, the nominated candidate becomes a director after going through the election procedure, such as a resolution of the general meeting of shareholders under Article 329 of the Companies Act. A director who has taken office owes the company a duty of care of a prudent manager and a duty of loyalty under the provisions of the Civil Code on mandate applied by Article 330 of the Companies Act and under Article 355 of the Companies Act. Because a director who has taken office owes a duty of loyalty to the company, even when responding to requests from the nominating investor, the director must carefully consider whether a conflict of interest with the company arises. It is also necessary to consider whether providing information to the investor would violate the company's confidentiality obligations or the director's duty of loyalty.

On the other hand, where the right is limited to nominating an observer, the observer gains the opportunity to attend and speak at board meetings but has no voting rights under the Companies Act. Since an observer is not an officer under the Companies Act, the observer is not in a position to directly owe the duty of care of a prudent manager or the duty of loyalty that a director owes. Because the scope of attendance and speaking is limited to the framework set out in the agreement, and given that this amounts to sharing information outside the company, it is necessary to confirm the scope of the confidentiality obligations and the handling of confidential information.

The frequency of board meetings should also be checked. If the company commits to holding meetings monthly, administrative work such as preparing materials, convening procedures and preparing minutes places a constant burden on management. In the early stages of a company, staff are often limited, and if this operational burden is underestimated, the time available for business activities may be squeezed. Where investors are granted the right to request that a meeting be convened, situations may also arise in which an extraordinary board meeting is demanded in addition to the regular meetings.

Contractual information inspection rights are separate from statutory shareholder rights such as the right to request inspection of accounting books under Article 433 of the Companies Act and the right to inspect financial statements and related documents under Article 442 of the Companies Act. Even if the shareholders' agreement provides for the submission of monthly trial balances and business plans, it is not understood that the statutory shareholder inspection rights are thereby automatically excluded in their entirety; the contractual provisions and the statutory rights coexist as separate matters.

An information rights provision is made up of obligations of differing nature layered together, such as an obligation to periodically provide financial statements and related documents, an obligation to submit monthly trial balances and cash flow statements, an obligation to submit an annual business plan, the handling of inspection of the books, and an obligation to respond to individual requests for reports or materials. Where multiple investors have come in at different times, variation in the content to be provided and the submission deadlines from investor to investor increases the burden on management and the administrative department. Care should be taken to align submission deadlines and reporting formats before signing.

Key Provisions on Matters Requiring Prior Approval and Stock Options

Matters requiring prior approval are among the provisions of a shareholders' agreement with the greatest impact on the issuing company and the management shareholders. The broader the scope of matters requiring approval, the narrower the range of actions that management can take nimbly.

The procedural categories are designed on the basis of whether prior "approval" is required, prior "consultation" is required, or after-the-fact "notice" is sufficient. An action requiring "approval" cannot be carried out unless the investor's express approval is obtained. For a matter requiring only "consultation," prior discussion is mandatory, but room remains for the company to proceed on its own judgment even if no final agreement is reached. Where "notice" is required, it is sufficient to report in writing or otherwise before or after the action, so the impact on the agility of management is smaller than with approval or consultation.

The approval procedure under the shareholders' agreement is separate from internal decision-making procedures, such as resolutions of the general meeting of shareholders and resolutions of the board of directors, prescribed by the Companies Act and the articles of incorporation. Even if a valid resolution is passed at the general meeting of shareholders or by the board of directors, failing to obtain the investor's approval under the shareholders' agreement constitutes a breach of contract. Conversely, even if the investor's approval has been obtained, an action lacking a resolution of the general meeting of shareholders or the board of directors as required by the Companies Act may be invalid under the Companies Act. Because the two procedures are based on norms of different dimensions, the company needs to obtain both the resolution under the Companies Act and the approval under the shareholders' agreement.

Matters frequently listed as subject to prior approval include the issuance of new shares or share options, the disposal of material assets, and changes of officers. Because these are directly linked to capital structure and governance, it is natural for investors to take an interest in them, but if the scope becomes too broad, there is a concern that day-to-day decision-making will stall. As a practical measure, negotiations are sometimes conducted to consolidate approval authority in the "Majority Investors." Who must actually give approval varies depending on how the definition of Majority Investors is designed, including the number of shares serving as the denominator, the method of calculating voting rights, the required percentage (such as a majority or two-thirds or more), and the method of aggregating the holdings of multiple investors. It is advisable to confirm this before signing in light of the company's own capital policy. It is also necessary to check whether any investors remain whose individual approval is required.

In the approval procedure, treating a non-response after notice as deemed consent is limited to cases where the contractual provisions expressly so provide. If there is no such provision, carrying out the action while no response has been received carries the risk of being found in breach of the prior approval provision. The Ministry of Economy, Trade and Industry's "Key Points to Note in Contracts for Sound Venture Investment in Japan" (Expanded Edition) (2025) also indicates a direction of reviewing the scope of prior approval and the holders of the right according to the company's growth stage and the maturity of its governance, and of making monetary thresholds and materiality more concrete.

The stock option (SO) pool provision also requires detailed review. Designs in which around 10% of the fully diluted number of shares is agreed as the SO pool are seen, but this percentage is merely one example. In addition to confirming the method of calculating the denominator and the definition of the grant allocation, it is necessary to confirm separately that, even for issuances within the pool, the issuance procedures under the Companies Act are carried out at the time of actual issuance, and whether contractual approval is required.

Where investors are granted a pre-emptive right (pro rata subscription right), confirm whether SO issuances within the pool are excluded from its scope. If they are not excluded, notice to investors and the provision of a subscription opportunity will be required every time someone is hired, making it difficult to grant incentives nimbly. Whether issuances within the pool are excluded from the pre-emptive right and whether they are excluded from matters requiring prior approval are points that each need to be confirmed separately. Unless both exclusion provisions are in place, smooth grants will be impeded even for issuances within the pool.

Agreements with existing investors sometimes contain terms such as "notice no later than two weeks before the issuance of shares, etc.," but this is a contractual example specific to each transaction and not a uniform rule under law. However, if this procedure is forgotten and share options are issued, the consequences may not stop at a breach of the shareholders' agreement but may cascade into a breach of the representations and warranties given to new investors. The need for prior notice or approval when later raising funds through J-KISS or issuing stock options is an easily overlooked issue. Points to note in raising funds through J-KISS are also covered in What Is J-KISS?.

Key Provisions on Management Shareholders' Obligations and Share Transfers

The provisions in a shareholders' agreement that require the most careful review from the perspective of the founders as individuals are those setting out the obligations of the management shareholders themselves. They provide for matters such as a duty of full-time dedication, a non-compete obligation, a prohibition on resignation and refusal of re-election, restrictions on share transfers, and an obligation to transfer shares upon leaving office as an officer.

Depending on their duration, the scope of the covered business, and the design of the consideration, these obligations directly affect the founders' careers. Check how far the non-compete obligation extends, how many years it survives after leaving office, how the transfer price is calculated when an obligation to transfer shares arises, and how the reasons for leaving (the distinction between Good Leaver and Bad Leaver) and exceptions based on investor consent are addressed. The existence of a provision in the agreement does not necessarily mean that resignation is legally restricted entirely, nor is a post-departure non-compete obligation automatically valid in its entirety. It is considered important to assess, taking into account the interests and protection of rights of both the company and the individual, whether the restrictions have become excessive.

Where the definition of "management shareholder" includes an asset management company, care is needed because the founder personally and the corporation are separate legal persons. Examine the actual reach of the definition: who is a party to the agreement, and whether the restrictions cover not only the shares held by the asset management company but also transfers of the founder's own equity interest in that corporation. If obligations on the founder personally and restrictions on the asset management company are conflated, an unintended breach of the provisions may occur.

As for the personal liability for damages and buyback obligations of the management shareholders, negotiating to narrow the covered conduct and the scope of liability may be considered. The Ministry of Economy, Trade and Industry's "Key Points to Note in Contracts for Sound Venture Investment in Japan" (Expanded Edition) (2025) also indicates a direction of avoiding excessive personal liability. In addition, for a buyback of shares by the company (acquisition of treasury shares), it is necessary to confirm the procedures under Articles 155, 156, 160 and other provisions of the Companies Act depending on the grounds for acquisition, as well as the distributable amount regulation under Article 461.

In the provisions on share transfers, confirm in which situations each of the following operates: the pre-emptive right (pro rata subscription right), which is a subscription opportunity at the time of a new issuance; the right of first refusal (ROFR), which is a right to purchase existing shares in priority when they are transferred; the tag-along right, which allows participation on the same terms in a transfer by the management shareholders; and the drag-along provision, which allows a demand for participation in a sale. These provisions stabilize the company's shareholder composition and also serve as a framework for coordinating the interests of each shareholder in future M&A and fundraising.

A drag-along provision is a right to require other shareholders to sell their shares in an M&A transaction that meets certain requirements, but it is based on an agreement among the contracting parties and differs from a squeeze-out procedure under the Companies Act, which automatically involves non-parties. Because it is a contractual claim, it cannot directly force minority shareholders who are not parties to sell. When reviewing the provision, confirm the approval percentage needed to trigger it, the minimum sale price, the notice deadline, and the scope of the representations and warranties and indemnification burden required upon the sale. How founder shares and the shareholders' agreement become an issue in an M&A context is also covered in Situations in Which Founder Shares and the Shareholders' Agreement Become an Issue in M&A.

As for most-favored-nation (MFN) provisions, it is necessary to anticipate the effect of granting favorable terms to other investors and to confirm the exclusions and the scope of what is compared. As for the term of the agreement, confirm whether it is designed to terminate upon an initial public offering (IPO). In the course of IPO preparation, securities companies and others customarily request that the rights relationships among shareholders be cleaned up, and to terminate the agreement, the company carries out the procedures in accordance with its provisions and the requests made in the listing examination.

Points to Check Before Signing and Post-Signing Operational Practice

In applying a shareholders' agreement to the company's own practice, it is necessary to systematically organize three stages: the items to check before signing, day-to-day operational management after signing, and the review of the agreement in subsequent rounds. If operational practice under the agreement is neglected, the company may merely have prepared the agreement without being able to embed it in day-to-day work, and may end up committing repeated breaches without realizing it.

Before reviewing individual provisions, the following organizes the issues to be checked against the company's own capital policy.

• Whether there is a definition that consolidates approval authority, such as "Majority Investors," and identification of the relevant investors based on the company's capital policy
• The scope of matters requiring prior approval and the organization of the procedural categories of approval, consultation and notice
• The content and submission schedule of information obligations, which tend to vary from investor to investor
• The percentage of the stock option pool and the provisions excluding it from the pre-emptive right and from matters requiring prior approval
• How corporations such as asset management companies are included in the definition of management shareholders and the extent to which the restrictions apply

When reviewing the agreement, I recommend using as the criterion whether it can be translated into an operational table that shows at a glance "who sends what, when, and to which investor." If translating it into this operational table seems difficult, the design of the information provision may itself have become too complex, and there is room to discuss simplifying it with the investors before signing. The company must check, in light of its internal legal and accounting resources, whether the schedule is achievable.

In day-to-day practice, prepare an operational table and decide internally on the person in charge and the submission deadline for each item.

Operational item	Provisions to check in the agreement
Periodic provision of financial statements and related documents	Submission deadline and covered investors
Monthly trial balance and cash flow statement	Submission deadline and recipient investors
Annual business plan	Timing of submission
Matters requiring prior approval	Category of approval, consultation or notice; approval holders (Majority Investors, etc.); whether there is a provision treating non-response as deemed consent
Issuance of shares, etc.	Whether there is a prior notice deadline; scope of the pre-emptive right and exclusion of the stock option pool

The shareholders' agreement is also subject to review in subsequent rounds. From Series B onward, existing investors and new investors are bundled together again into a single agreement, and renegotiation takes place, including whether to maintain the existing terms or amend them to match the new terms. If separate agreements are layered on each time a new investor joins, discrepancies in rights arise among investors, the need for approval and the procedures differ from investor to investor, and the procedure for the company to obtain approval becomes complicated.

There are mainly two options for dealing with subsequent rounds. One is to terminate the existing shareholders' agreement by mutual agreement and enter into a new agreement with all investors as parties. The other is to maintain the existing agreement and handle the participation of new investors and changes to the terms through an amendment agreement (memorandum) or a joinder agreement. Handling the addition of investors in a subsequent round through a memorandum or joinder agreement can, in some situations, reduce the burden of coordination among the parties compared with redrafting the entire agreement. Whichever method is adopted, it is necessary to confirm that the amendment requirements set out in the actual agreement are satisfied.

It is considered desirable for the issuing company to keep in mind, from the stage of signing the Series A shareholders' agreement, how easily the agreement can later be restated or handled by memorandum. This is because, if the drafting of definitions and matters requiring prior approval is overly individualized for each investor, the burden of consolidating the agreements in subsequent rounds will increase. Keeping standardization of the contractual provisions in mind and minimizing special terms that apply only to particular investors leads to smooth future fundraising. An overview of financing through class shares is also explained in detail in What Is Financing Through Class Shares (Preferred Shares)? An Overview of Series A Agreements and Procedures.

Frequently asked questions

What is the difference between a shareholders' agreement and an investment agreement?

While the investment agreement is the entry contract that completes the transaction procedures of a financing, the shareholders' agreement is a contract that sets out the post-investment management structure and the rights and obligations among the shareholders and governs them on an ongoing basis. The investment agreement performs its main obligations through payment and the like, whereas the shareholders' agreement continues to govern day-to-day governance and operational practice over a long period.

What are matters requiring prior approval in a shareholders' agreement?

They are provisions that require the investors' approval or consultation in advance for certain actions of the company, such as the issuance of new shares or the disposal of material assets. Because broad matters requiring approval restrict nimble decision-making, negotiations to consolidate the authority in the Majority Investors and reviews to make monetary thresholds and materiality more concrete are considered.

What are the Majority Investors in a shareholders' agreement?

They are a category of investors established to consolidate authority such as prior approval. The number of shares serving as the denominator, the method of calculating voting rights, the required shareholding percentage and the method of aggregating the holdings of multiple investors are designed, and the definition functions as the standard for determining whose approval must be obtained for a particular action.

When does a shareholders' agreement terminate?

The term is determined by the termination clause of each agreement. In some cases, termination is conditioned on an initial public offering (IPO), a decline in an investor's shareholding ratio, or the departure of a particular party. In the course of IPO preparation, termination procedures are carried out in response to requests from securities companies and others.