Shareholders’ agreements: protecting potentially divergent interests

Do you own a company with multiple shareholders? Are you a majority or minority shareholder? Do you know what a shareholders’ agreement is? Just take a few minutes and allow myLIFE to explain when such a document might come in handy.

A shareholders’ agreement is a private agreement in which all or some of a company’s shareholders set out their rights and obligations vis-à-vis said company as well as the decision-making and investment processes. It takes the form of a tailor-made contract enabling its signatories to agree on certain points, clarify relations between the various parties and settle any disputes.

It tends to be drawn up when a company is founded or taken over. However, it can also be implemented at other times, like with the arrival of a new shareholder or investor (business angel).

Be aware that in French, we talk about a pacte d’actionnaires for a société anonyme (SA – public limited company) and a pacte d’associés for a société à responsabilité limitée (SARL – private limited company).

The aim of a shareholders’ agreement is to establish a healthy, transparent relationship between the shareholders of a business.

Shareholders’ agreements should not be confused with articles of association

Even though these two documents contain similar measures, a shareholders’ agreement does not supersede the articles of association. Instead, it merely complements them and is especially useful for keeping delicate arrangements between shareholders confidential. These two documents are not mutually exclusive, and their main differences are as follows:

While a shareholders’ agreement can sometimes be subject to foreign law, the Luxembourg law governing the operation of the company remains in force. This principle is known as lex societatis.

Why draw up a shareholders’ agreement?

The aim of a shareholders’ agreement is to establish a healthy, transparent relationship between the shareholders of a business by guaranteeing their rights and defining their commitments.

The clauses of the contract govern interactions between the signatory shareholders throughout the life of the business. It is therefore very important to thoroughly review the different scenarios that might provoke conflict and make provision for them in the shareholders’ agreement so that any disputes are mitigated.

Moreover, if the company is not listed on the stock exchange, the shareholders’ agreement has the advantage of being confidential and known only to its signatories. This is undoubtedly a plus for shareholders who wish to keep the agreements and arrangements between them under wraps. But there is a flip side, of course: since the agreement is confidential, it is not legally binding on the company, on non-signatory shareholders, on any new shareholders (unless they sign up to the agreement) or on third parties. If the company is listed on the stock exchange, there is limited confidentiality because some aspects of the agreement must be communicated to the financial markets regulatory authority.

Lastly, not only does the shareholders’ agreement govern relationships between shareholders, it is also extremely flexible and can be customised at will. As such, it is updated with the arrival of every new signatory.

Shareholders’ agreements are divided into three categories: the share capital of the business, the voting rights of the shareholders and the management and organisation of the company.

What is in a shareholders’ agreement?

A shareholders’ agreement consists of several clauses that can be broken down into three categories: the share capital of the business, the voting rights of the shareholders and the management and organisation of the company.

The various measures are included in accordance with the investors’ demands and the nature of the business.

Here is a non-exhaustive list of the most frequent clauses:

• Unanimity clause: certain company-level decisions require the approval of all the agreement’s signatories
• Pre-emption clause: other shareholders are given first refusal on shares sold by an exiting shareholder
• Approval clause: the shareholder wishing to sell their shares must seek the approval of the general meeting of shareholders or the competent body designated by the clause
• Anti-dilution clause: shareholders get a preferential subscription right in the event of a capital increase, thereby ensuring their stake is not diluted
• Guaranteed withdrawal clause: shareholders are entitled to withdraw from the agreement should a specific event occur or deadline pass
• Liquidity clause: investors are guaranteed to get their investment back if they sell
• Buy or sell clause: one shareholder can offer a certain amount to another to buy their shares. Either the recipient of the bid agrees to sell their shares for the offer price or they buy the other shareholder’s shares for the price initially offered
• Lockdown clause: shareholders are forbidden from selling their shares for a defined period
• Drag-along clause: shareholders are forced to sell their shares under certain conditions
• Tag-along clause: if one shareholder sells their shares, the others can sell their shares to the buyer at the same price

Things to look out for

Although it is not compulsory, it is recommended that a shareholders’ agreement be drawn up by a jurist, a lawyer or a specialist. Remember that a shareholders’ agreement is a contract that is binding on all its signatories. It is not, however, binding on the company, on non-signatory shareholders, on any new shareholders (unless they sign up to the agreement) or on third parties.

Another important point: the shareholders’ agreement cannot contravene the public order rules of the law on companies. Some clauses are forbidden, such as unconscionable clauses that deprive one or more shareholders of any profit-sharing right and/or exempt one or more shareholders from any sharing of losses.

Lastly, it is strongly recommended that a shareholders’ agreement have a fixed duration. If the agreement is open-ended, it can present several problems.

To conclude, although drawing up a shareholders’ agreement may seem arduous, it can establish structural principles for the life of the company or the relationships between shareholders.