What is the purpose of the shareholders' agreement?
When a company is created, the founders draw up the articles of association, a legal document setting out the fundamentals of the company such as its characteristics (form and corporate purpose) and its operating rules (rights, powers, responsibilities). Once this step has been taken, it is wise to consider drafting a shareholders' agreement. Unlike the articles of association, this separate and complementary private law contract is concluded between all or some of the shareholders to organise their internal relations.
The basics of the shareholders' agreement
The shareholders' agreement protects the founders/historical or operational partners among themselves but also the investors (when there are any). Unlike the articles of association, the shareholders' agreement is drafted freely by its signatories, under private signature, i.e. it does not have to be "authenticated" by a notary, a bailiff, a lawyer or any other sworn person. This confidential agreement is used to specify certain aspects of the company's operation and to anticipate possible disagreements between shareholders. It aims to ensure their security by clarifying their relations and strengthening the protection of their common interests. This contract is subject to the rules of application of contracts and has a period of validity freely set by the parties.
Not to be confused: shareholders' agreement vs. shareholders' agreement: it should be noted that the shareholders' agreement differs from the shareholders' agreement by the form of company concerned. The shareholders' agreement is used in joint-stock companies (SA, SAS) while the shareholders' agreement concerns partnerships (SC, SARL).
The use of a shareholders' agreement has several significant advantages :
Increased confidentiality: unlike the articles of association, the shareholders' agreement is not subject to official publication. This makes it possible to keep certain sensitive clauses confidential, thus escaping the knowledge of third parties and even non-signatory shareholders.
Adaptability to specific needs: the agreement provides flexibility to address specific situations specific to certain shareholders and also includes temporary provisions.
Contractual freedom: shareholders have a great deal of freedom in the drafting of the agreement, which allows them to define specific rules according to their needs and agreements.
The main clauses
At the heart of this pact are various clauses, each aimed at governing specific aspects of the social and economic life of the company. These specific and general clauses are designed with the aim of protecting the interests of shareholders, guaranteeing the stability of the shareholding and providing for the terms and conditions of management and exit of each party.
Namely, the shareholders' agreement is a tailor-made document that adapts to each situation, so each clause is specific to its agreement. A multitude of clauses are possible and are mainly categorized into four categories: clauses relating to the governance and operation of the company, those relating to securities, those relating to investor rights, and finally general clauses.
Clauses relating to the governance and operation of the company:
These clauses establish the responsibilities of the leaders (and others) and establish voting rules for certain important decisions such as the need for unanimous agreement or a right of veto.
Type of clauses | Explanations |
Governing body/or governance body | Establishes the creation and powers of an advisory or non-advisory body, whether extra-statutory (strategic committee) or statutory (board of directors or supervisory committee) and specifies the procedures for the appointment, dismissal and operation of this body in terms of the management of the company.
Also defines the establishment and missions of this body and determines the decision-making procedures of this body. |
Reporting | Imposes on the company the obligation to provide its shareholders with regular financial, operational and/or strategic information |
Buy or sell | Provides mechanisms to settle disputes between shareholders in the event of major disagreements (offer to buy or sell shares): allows a shareholder to buy or sell his shares to the other co-shareholders (in the event of a divergence on the company's strategy or management). |
Clauses relating to securities:
These clauses include the transfer of shares (otherwise known as "transfers") supervised by the partners or a specific body. This prevents third parties from entering the capital without the agreement of the other parties (for example).
Type of clauses | Explanations |
Amenity | Stipulates that any transfer of shares by a shareholder to a third party must be subject to the prior approval of the other shareholders (or an identified quorum). |
Right of first refusal | Grants shareholders the right of priority to acquire the shares that a shareholder wishes to sell to a third party: allows them to maintain their level of participation in the company (in the event of a sale of shares by a co-shareholder). |
Inalienability or non-transferability | Prohibits a shareholder from disposing of his or her shares for a specified period of time or under certain circumstances. |
Ratchet | Automatically adjusts investor participation based on certain events (future funding rounds or company performance): Aims to reward investors for their initial commitment. |
Liquidity | Sets out the terms and conditions for the exit of shareholders, in particular in the event of the sale of their shares or a buyout by the company itself. |
Transfer of securities | Sets out the terms and conditions under which shares of the corporation may be transferred between shareholders (or to third parties). |
Good/Bad leaver | Allows investors to acquire the shares and other securities giving access to the company's capital held by the founders/partners, in the event of a breach of their exclusivity commitments, non-competition and any other violation of the pact, as well as for dismissal for serious or gross misconduct. |
Employee profit-sharing | Provides for the possibility for the company's employees to acquire shares in the company, generally on advantageous terms. |
Clauses relating to investor rights:
These clauses protect the interests and guarantee the rights of investors in a company. They ensure fair treatment between each shareholder and facilitate the exit of investors.
Type of clauses | Explanations |
Anti-dilution | Protects investors' rights in the event of a subsequent issue of shares at a lower price than the price at which they originally invested. |
Pari-passu | Ensures that all shareholders are treated equally with respect to their rights and benefits in the company. |
Investor exit | Defines the mechanisms for the repurchase of shares by the company itself, by other shareholders or by third parties. |
Total Joint Exit Fee and/or proportional (tag along) | Allows a minority shareholder to join the transfer of a majority shareholder's shares to a third party, under the same conditions as the latter. |
Joint exit obligation (drag along) | Authorises a majority shareholder to force the other shareholders to a third party in the context of a majority sale of the company. |
Priority | Grants certain shareholders the right to participate in priority in any capital increase of the company. |
General clauses:
These clauses form the essential basis of shareholders' agreements and are essential to ensure their proper implementation.
Type of clauses | Explanations |
Definitions | Establishes the objectives and motivations of the pact. |
Confidentiality | Imposes an obligation of confidentiality on the signatories. |
Audit and information | Obligation by the company to communicate to all partners and, where applicable, to Investors exclusively, enhanced information on the company's activity (frequency to be defined).
A permanent audit fee may also be requested. |
Intellectual property | The founders/partners undertake to ensure that all intellectual property rights belong to the company. |
Loyalty | Obligation in all circumstances to act fairly towards the company and investors. |
Exclusivity | Obligation for each founder/partner to devote the exclusivity of his or her professional activity to the company, except for unpaid involvement in the company's ecosystem or associative commitment outside the company's ecosystem. |
Non-competition | Prohibition for each founder/partner to contribute directly or indirectly, whether remunerated or not, to a competing company during his or her activity within the company or one of its subsidiaries and n months after the closure of the company. |
Management of the pact | Refers to the manager of the agreement who thus has the power to force or refuse sales by signing orders for the movement of securities in place of shareholders who refuse to perform their obligations in violation of the shareholders' agreement. |
Drafting and drafting of the pact
The stakeholders in the shareholders' agreement vary according to the specific circumstances and needs of the company. Usually, this involves founders, existing shareholders, investors, and often legal advice that specializes in issues related to start-ups and venture capital.
In many start-ups, the initial founders draw up a first version of the shareholders' agreement, together with specialised legal advisors. This version can then be discussed and negotiated with potential investors.
Ideally, the shareholders' agreement should be drafted in the early stages of setting up the company. However, in practice, it is often written at the time when outside investors come into play, usually during a fundraising.
The drafting of the pact is also triggered by specific events such as conflicts between the founders, or significant changes in the strategic direction of the company.
The shareholders' agreement process typically involves several steps, including:
Identification of the needs and objectives of the various stakeholders.
The negotiation of the terms and conditions of the pact, taking into account the interests and concerns of each party (if investors then this is regularly accompanied by discussions around a Term Sheet or LOI presenting the said conditions).
The initial drafting of the shareholders' agreement, often carried out by specialized lawyers or legal experts.
Reviewing and adjusting the document based on feedback and discussions between stakeholders.
The final signing of the shareholders' agreement once all parties are satisfied with the terms.
As you can see, the shareholders' agreement is a fundamental document to be signed when creating a company or when new shareholders enter a start-up (fundraising). Confidential and customizable, this pact helps to prevent conflicts, distribute powers between each party, and consequently stabilize governance.
