When a number of individuals or legal entities decide to form a partnership, it is important to lay down the rules as to how they will operate together. Because if relationships between partners collapse, the proper functioning of the company is at risk of suffering. In our 8 October article, we discussed the problem of difficult negotiations between shareholders who no longer get along. 

But it’s better to be safe than sorry. The purpose of a shareholder agreement is exactly that. 

A shareholder pact or agreement can be defined as the following: a private law agreement between shareholders whose purpose is to define the relations between them and how the company of which they are shareholders is managed. 

These two stipulations apply to all companies and are often sufficient. The shareholders’ agreement supplements the law and the articles of association. It is therefore an optional contract, but useful in certain cases. 

Unlike the articles of association and the law, the shareholders’ agreement is private and usually even secret. Although it is binding on the parties, it cannot be enforced against third parties, even the company whose shareholders it regulates. 

The shareholders’ agreement generally has two main objectives: 

– To establish an operational framework for the company and its shareholders; 

– To provide for changes in shareholding. 

These objectives are reflected in a number of clauses, which can of course be adapted to the wishes of the parties. 

These are the usual elements related to the proper functioning of the company: 

– Organisation of day-to-day management: delegation, power of signature (alone or with others). 

– Organisation of the Board of Directors: composition, powers, frequency, procedure in case of deadlock. 

– Reporting extended to non-active shareholders. 

– Remuneration of active shareholders: operating principles, conflicts of interest, benefits of all kinds. 

– Policy on profit distribution, incentive mechanisms for active shareholders. 

– Non-competition and exclusivity clauses for active shareholders. 

There are many cases of shareholding changes and clauses in this area are complex. When it comes to delineating the interests of the partners, which are by definition divergent, a balance has to be struck with which everyone can be satisfied. 

In business practice, certain clauses have been standardised over time. They are Anglo-Saxon-inspired and appear in most contracts around the world. Some are more typical when a private equity investor is involved. 

These are the main clauses: 

– Right of pre-emption between partners: this is a very classic clause, but it can be applied in different ways. 

– Standstill clause: the partners agree not to sell their shares for a certain period of time. Used to stabilise capital after an LBO. 

– Tag along: if one shareholder sells his shares, the others can follow him on the same terms. This protects minority shareholders. 

– Drag along: if a majority of partners want to sell, the others must follow. The aim is to prevent a small shareholder from being dragged along and make the company saleable. 

– Guaranteed exit clause: one of the partners undertakes to buy out the others at a predetermined price and on an agreed date. This can reassure, for example, a minority partner planning for retirement. 

– Clause limiting strategic decisions (asset sales, acquisitions, new loans, etc.) to a qualified majority or even unanimity. 

– Withdrawal clause: allows a partner to withdraw if any of the specified events occur. 

– Exclusion clause: allows a partner to be excluded in serious and predetermined cases. 

– Buy or sell clause: obliges shareholder A to sell or buy back shareholder B’s shares. Allows a conflict situation to be resolved... 

– Procedure in case of death or work-related disability. 

– Non-dilution clause: pre-emptive right granted to certain shareholders when issuing new shares (less common). 

– Ratchet clause: a shareholder who has paid too high a price can adjust its price if other shareholders can subsequently acquire shares at a lower price. 

It should also be noted that the shareholder agreement should include a mechanism for determining value. This may be more generous to a good leaver than to a bad leaver. 

You see, although the shareholder agreement contains a series of standard clauses, the subject is complex and there are many pitfalls. It is best to surround yourself with specialised lawyers who can not only guide you in drafting the agreement, but also assist each party in case of a dispute. 

A good shareholders’ agreement seeks to balance the interests of majority and minority shareholders, and between active and inactive partners. 

Tanguy della Faille 

FB TRANSMISSION 

tanguy.della.faille@fb-transmission.com