Shareholders’ agreement

What it means

A shareholders’ agreement is a contract the shareholders conclude among themselves alongside the articles of association. The articles are filed in the collection of deeds and are public, while the shareholders’ agreement stays confidential and can contain details they do not want published.

It typically sets out how the shareholders will vote on key matters, who funds the company and how, who works in it and for what pay, how deadlocks are resolved and on what terms someone may leave or sell their stake. It is complemented by a pre-emption right, tag-along and drag-along clauses or a non-compete.

The agreement binds only the shareholders among themselves, not the company or third parties. If a shareholder votes at the general meeting against the agreement, the resolution is valid, but the others can claim a contractual penalty or damages from them.

How it works in practice

When an investor such as a business angel comes in, the shareholders’ agreement is the main transaction document. It builds on the term sheet and sets the investor’s rights, the directors’ reporting duties and the terms of later funding rounds.

For family companies and companies of two friends we recommend concluding the agreement right at the start, while relations are good. It should above all deal with a shareholder leaving, dying or divorcing and with how the price of the stake is set in that case, for example by a business valuation using a method agreed in advance.

For a minority shareholder the agreement is often the only protection: it can guarantee a seat on a board, a veto on fundamental decisions or the right to sell alongside the majority. Disputes are often referred to an arbitration clause or mediation.

What to watch out for

Provisions contrary to the mandatory rules of the Commercial Code are void even if the shareholders sign them. It is not possible, for example, to exclude a shareholder’s statutory right to information or relieve a director of liability, so the agreement should be drafted by a lawyer, not taken from an internet template.

The agreement must be consistent with the articles. If they conflict, for example on share transfer rules, the articles govern for the company and the register, and the agreement only creates claims between the shareholders. Whenever one document changes, we therefore check the other.