This article deals with the types of provisions that may be contained in a shareholders’ agreement. The list is not at all exhaustive. Generally each jurisdiction has a corporate law, which sets out certain standard procedures and ways in which decisions are made (e.g. minority protection rights, etc.) in the absence of a shareholders’ agreement.
In the same way as a prenuptial agreement, a shareholders’ agreement is necessary if the parties want to deviate from the way that the law would normally operate. Sometimes it is possible to set out the entire understanding of the shareholders in the articles of association of the company. In certain instances, however, a shareholders’ agreement may work better than reliance on articles of association.
The intent here is merely to highlight some of the more important issues:
Decision making at the general meetings of shareholders: What is the quorum, decisions by simple majority or supermajority, special veto rights.
Constitution of the board and voting: How many members? What is a quorum? Who votes? Who may exercise a tie-breaking vote, etc.
Decision-making on the board: Are decisions made by a simple majority, or supermajority? Are there certain classes of issues (e.g. raising additional equity, acquisitions, mergers, liquidation, etc.) which may require supermajority.
Appointment of board of directors: Who appoints the officers of the company? Is each appointment made by the assembly of shareholders? Or do certain shareholders or classes of shareholders have the right to appoint one or more directors on the board?
Appointment of officers: Is the CEO, or are other officers appointed by a simple majority of the board? Or are certain officers to be designated by certain supermajorities of directors? Does any board member have veto power over appointment of officers?
Raising additional capital: What triggers a capital call? What happens if one or more shareholders cannot keep pace with the capital call, will they be diluted? If so, to what extent?
Ensure arms’ length transactions: minority shareholders need protections against special related party transaction, which may siphon off the assets of their company to the sole benefit of the controlling shareholder.
Rights of first refusal: When one shareholder wishes to sell, other shareholders often want a right to buy the exiting shareholder, to ensure that they are not co-shareholders with strangers, or worse, hostile parties.
Put and call options: Can one shareholder opt to sell his shares to other shareholders (put option) or can a shareholder opt to buy shares of another shareholder (call option)? If so, at what price? Pricing the shares of privately held companies involves complex valuation issues typically performed by investment advisors.
Drag along and tag along rights: If a shareholder decides to sell shares, can he trigger an obligation of other shareholders to sell on the same terms (drag along rights)? Or if there is one shareholder who sells, can another shareholder decide to tag along with such transaction, and sell on the same terms at the same time (tag along rights)?
Dispute resolution: Will there be mediation, arbitration, or resort to a court system? Under the laws of what country?
A shareholders’ agreement can be complex and can take weeks or months of negotiation. The devil is always in the details. Very often parties negotiate it with undue haste, only to find that if their relationship breaks down with other shareholders, the shareholders’ agreement does not provide adequate protection or clear path for remediation. It is well worth involving an experienced lawyer, and investing the time and effort necessary to negotiate and execute a shareholders’ agreement up front.
