6 points of interest in a shareholders’ agreement

The shareholders’ agreement is the most important agreement entered into between shareholders and the company. What matters should you cover in this agreement?

The shareholders’ agreement sets out the rights and obligations, responsibilities and organisation of the company. This way it structures the cooperation within the company and avoids possible conflicts between shareholders. Clear and thoughtful shareholder agreements can protect shareholders’ interests and ensure well-structured business operations. It is therefore very important to make clear agreements.

In this blog, we discuss six points for consideration in the shareholders’ agreement. These points touch on the structure (governance) of the company and the relationship between the shareholders themselves.

1.   Non-compete clause

Including a non-compete clause in the shareholders’ agreement offers a number of advantages that promote the protection of the company’s interests and its stability. First, the clause protects business interests. A shareholder may not compete with the company. In addition, such a clause prevents sensitive business information and strategic plans from being used by competitors. Furthermore, a non-compete clause promotes mutual loyalty. By including this clause, shareholders are discouraged from competing with the company during their shareholding or after its expiry. An additional benefit is that it makes the company more stable.

To encourage compliance with the non-compete clause, a fine is often agreed. Shareholders can be financially punished if the clause is breached. The inclusion of a fine reinforces compliance with the clause and, with its deterrent effect, provides further protection for the company.

2.   Chain clause

A perpetual clause obliges shareholders to ensure that new shareholders also become part of or party to the shareholders’ agreement. Therefore, this is immediately the main advantage that a chain clause brings. New shareholders become part of the agreement. The rights and obligations therefore also become applicable to the joining shareholders. A chain clause offers important advantages by ensuring continuity of obligations and protecting the company against potential risks that may arise from the transfer of shares.

3.   Drag along / tag along

A drag along / tag along clause plays an important role in the sale of shares. The drag along clause means that a selling (majority) shareholder can force his fellow shareholder(s) to sell their shares as well. Thus, all shares can be sold to the same buyer. This often leads to a higher price.

A tag along clause means that a minority shareholder can co-sell his shares if the majority shareholder sells his shares. This provision aims to protect the minority shareholder’s interests. The tag along clause does not impose any obligation on the minority shareholder, he can choose whether he wants to sell the shares. The shareholder is given the choice to tag along on the majority shareholder’s sale.

Note that including conditions under these arrangements is very important. This prevents the provisions from being abused. In particular, the tag along clause should require that the minority shareholder does get the same rights as the majority shareholder.

4.   Deadlock

In the event that both shareholders hold 50% of the shares, a situation may arise where the parties end up in a deadlock. As a result of a deadlock, no more resolutions can be taken in the general meeting. To avoid such a situation, it is advisable to include arrangements to this effect in the shareholders’ agreement. These arrangements may involve compulsory mediation or a shoot-out regulation whereby parties make an offer for the other shareholder’s shares. Examples of a shoot-out include the ‘Texas shoot-out’, the ‘Mexican shoot-out’ and the ‘Russian Roulette’.

5.   Approval of board decisions

Board decisions can have far-reaching consequences for the company and can even change its identity. To prevent board decisions from changing the company’s identity, a list of subjects requiring shareholder approval can be included in the shareholders’ agreement. These decisions can range from raising loans to buying property and paying dividends.

It is also possible to include such a provision in the articles of association. The major difference between including the provision in the shareholders’ agreement and in the articles of association is the consequence of any breach. In case the provision is in the articles of association, the board adopts an invalid resolution. Acting in breach of the shareholders’ agreement results in a breach of contract. Furthermore, provisions in the shareholders’ agreement are secret, while a provision in the articles of association is also known to third parties.

6.   Dispute resolution

Disputes between shareholders can jeopardise the continuity of the company. Therefore, it is convenient and wise to agree on a dispute settlement arrangement at the beginning of the cooperation. The agreement can stipulate that the parties will first try to resolve the issue through arbitration, mediation or another form of out-of-court dispute resolution.

By including a dispute resolution provision, the shareholders try to resolve the dispute in an efficient and less damaging way. By doing so, they try to avoid the courts. In case nothing is included, the statutory dispute resolution with buy-out and exit procedures applies.

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