The key to a successful collaboration: the shareholders' agreement

Clear arrangements between shareholders are essential for sound and lasting cooperation. In addition to the mandatory articles of association, it is far from superfluous to lay down (additional) arrangements in a separate shareholders’ agreement. This agreement offers numerous options that can be tailored to the needs of the shareholders and their collaboration through clear and specific arrangements.

In a previous news blog, we examined the relationship between the articles of association and the shareholders’ agreement. In this news blog, the focus will be on the content of this agreement, and, using a few sample clauses, the virtually endless range of possibilities will be highlighted.

What is a shareholders’ agreement?

A shareholders’ agreement is a private agreement that governs the relationship between the shareholders. A shareholders’ agreement gives you, as a shareholder, the freedom—subject to compliance with certain legal limitations—to make arrangements among yourselves. Within the limits of their individual rights, shareholders are in principle therefore free to contract regarding the exercise of their rights.

In what follows, we will discuss a number of possible clauses, divided into three categories: the transferability of shares, the organization and operation of the company, and conflict management.

The transferability of shares

A shareholders’ agreement may include arrangements concerning the transfer of the company’s shares. Depending on the intent and specific wishes of the shareholders and the objective they have in mind for their cooperation, these clauses may regulate either a rather restricted or a rather free transferability.

The most restrictive clause in this respect is the non-transferability clause. In this case, the parties undertake not to carry out any transfer of shares for a certain period. Its purpose is to safeguard the stability of the shareholding, as well as the stability and continuity of the company.

A less far-reaching clause is the approval clause, which makes the transfer subject to the prior approval of, for example, the other shareholder(s) or the company’s governing body. This clause prevents just anyone from becoming a shareholder.

Another option is to provide for free transfers. The agreement may stipulate that certain transfers are unrestricted and therefore not subject to specific limitations. An example is the transfer of shares to an affiliated company.

It is also possible to consider both a pre-emption clause, a call option (‘call’) or a put option (‘put’). A pre-emption clause means that shares may only be transferred after the beneficiary or beneficiaries of the pre-emption right have been given the opportunity to purchase the shares concerned. The purpose of such a clause is to keep the shares in the hands of the existing shareholders and to preserve the balance of power. The call/put option grants the right to buy/sell shares from/to the grantor of the option (within a certain period). Such a right may constitute an enforceable entitlement. This implies that all parameters (including the price) must be determined or determinable from the outset.

Transferability clauses can also be included to protect minority or majority shareholders. Under a tag-along right (‘tag along’), the beneficiary has the right to transfer (all or part of) their shares together with another shareholder, usually under the same conditions. It therefore facilitates transfer for the beneficiary and restricts transfer for the promisor. Under a drag-along obligation (‘drag along’), by contrast, the promisor is required to transfer their shares together with another shareholder, which is the opposite of a tag-along right.

A final clause regarding the transfer of shares that we wish to discuss is the claw-back clause. This clause means that if the acquiring shareholder decides, within a certain period, to resell the shares to a third party at a (substantially) higher price, they are obliged to pay part of the realized capital gain to the former shareholder. This clause therefore ensures that speculation to the detriment of a (former) shareholder is avoided.

Organization and operation

The organization and operation of the company can also be regulated in a shareholders’ agreement. For example, the company’s (day-to-day) operation can be set out in the agreement, such as the frequency of consultations/meetings, the division of tasks between directors, and reference can be made to the business plan setting out the company’s future expectations.

More specifically, a shareholders’ agreement can regulate the organization and functioning of the board. For example, the composition of the board may be subject to a binding nomination arrangement. A binding nomination by a third party, such as an investment company, is also possible. In addition, the general meeting may be required to appoint candidate directors who meet specific qualitative requirements. Besides the composition of the board, its functioning (as well as that of the general meeting) can also be regulated. It may provide for attendance and/or reinforced majority quorums. Important powers of the board may also be made subject to the consent of the general meeting.

Finally, we would like to discuss two optional financial clauses. The first concerns setting out arrangements regarding remuneration in the agreement, specifying whether the mandate is paid or unpaid. These arrangements can also be elaborated in a directors’/management agreement. The second clause concerns including arrangements on profit distribution and dividends by determining a dividend policy in the agreement.

Conflict management

Finally, we need to discuss the options regarding conflict management. Although the starting point should always be a successful collaboration, we nevertheless advise you as a shareholder to be prepared for problematic situations or even a possible termination of the collaboration. In that context, we discuss the deadlock mechanism and the leaver clause.

A deadlock mechanism is included to prevent a situation of persistent disagreement between the shareholders and/or the directors that could jeopardize the interests of the company (‘deadlock’). To that end, a procedure is set out to resolve such situations. That solution may consist of various procedures, such as an attempt at reconciliation or mediation, a binding third-party decision, or the insertion of a ‘cooling-off’ period.

The leaver clause is a clause under which shareholders who are active within the company may undertake to transfer all shares they hold in the company to the other shareholders if a certain situation arises. Depending on the specific circumstances, this may qualify as either a ‘good’ or a ‘bad’ leaver. The cases in which it applies must always be defined precisely.

In the case of a ‘good leaver’, this may for example involve a departure after a minimum agreed period, due to illness, or resignation by the person concerned because of serious fault on the part of the company. The purchase option for the other shareholders may then be exercised at a normal/favourable valuation for the key person.
In the case of a ‘bad leaver’, this may for example involve dismissal for serious fault on the part of the shareholder or an (unauthorised) departure within a specific period contractually agreed. The purchase option for the other shareholders may then be exercised at a valuation favourable to them.

Decision

A shareholders’ agreement offers the possibility to contractually set out clear arrangements tailored to the shareholders and to the objective they have in mind for the company. Are you a shareholder in an existing company, or are you considering setting up a company and wish to clearly regulate the relationship between the various shareholders? If so, do not hesitate to contact the experts in our corporate law department.