When Should You Establish a Shareholders' Agreement?
For founders of a PLC, the question arises sooner or later as to whether they need a shareholders' agreement. Especially from SME circles, one often hears that this is already standard. But is such an agreement absolutely necessary? And what exactly should it include? We will answer these and other questions for you regarding the topic of shareholders' agreements.
Term and Significance of the Shareholders' Agreement
The shareholders' agreement goes by many names. Some call it a pool agreement, others a syndicate agreement, or shareholder consortium. However, they all refer to the same thing. A shareholders' agreement is exclusively applicable to the legal form of a PLC. The fundamental goal of this contract is to regulate the rights and obligations of the shareholders among themselves. Additionally, you can integrate non-shareholders into the contract – typically, these are potential future stock buyers.
But why go through the effort when there's corporate law? From its perspective, the tasks of a shareholder are very simple: they only have one obligation, and that is to pay the corresponding share capital. Within large corporations, where shareholders often are completely unknown to each other, that may suffice. In smaller companies, it's usually different. Especially when the company has only a few shareholders, there is a closer bond among them. Then, there is a desire to know who else is involved besides oneself. This implies the need for establishing equal rules – both from the shareholders' and the company's perspective.
Structure and Content of the Shareholders' Agreement
As mentioned earlier, a shareholders' agreement never governs shareholders' legal obligations to the corporation. It always regulates only the obligations between the individual contracting parties themselves.
Regarding the substantive scope of the contract, there are no specific legal provisions. General legal requirements must be adhered to. Additionally, you must consider the right to privacy and public order. Of course, the contract must not contain any immoral contents (Art. 19 para. 2 CO).
In most cases, a shareholders' agreement is based on both corporate law and contractual agreements. The basis of a shareholders' agreement usually consists of the following points:
- Contracting parties
- Preamble
- Contractual basis
- Contract duration
- Criminal provisions in case of breach of contract
- Succession arrangements in case of death
- Jurisdiction
- Severability clause
Additionally, most contracting parties opt for these supplementary contents:
- Voting restriction clauses
- Responsible individuals and responsibilities in the board of directors
- Sale regulations and price determination mechanisms
- Loyalty duties and non-compete clauses
- Additional contribution obligations
- Regulations regarding employee participation, especially in succession arrangements
- Deadlock clauses
- Obligation to transfer in case of entry of additional shareholders
Some of the provisions listed above often reinforce the efforts of founders to actively work towards a shareholders' agreement, as these contents are often perceived as particularly useful within the context of shareholder relations. We will briefly discuss three of them.
Legal Form and Duration
A shareholders' agreement can be concluded before, during, or even after the establishment of the company. Theoretically, this can be done orally. However, in practice, this is almost never the case because most clauses require written form for legal validity. This is advisable anyway.
While the parties to the contract try to secure the contract for as long a duration as possible, the law aims to avoid excessive contractual binding. Nevertheless, the statutory provision regarding the duration is quite open. It does, however, include the information that a shareholders' agreement cannot be "indefinite." In practice, the document is usually limited to a certain period of time. At the very least, the contract must be terminable within reasonable, if not the legal, deadlines. It is recommended that you establish provisions for both ordinary and extraordinary termination notice periods.
Contract durations of up to twenty years are not uncommon and are permitted in most cases. Sometimes, the parties may devise a clever method to align the duration with the end of the company's term. However, be cautious here, as this method is often legally questionable. Ultimately, an appropriate duration can only be assessed taking into account the contents of the contract.
Restrictions on Transfer
Since a shareholder, without separate regulation, legally has the right to sell their shares at any time as they see fit, a restriction forms one of the most sensible points within a shareholders' agreement. Particularly popular are the inclusion of the following clauses:
Right of first refusal
If a shareholder intends to sell their shares, they are obligated to offer them to the other contracting parties for purchase for a specified period of time.
Pre-emption right
If the shareholders do not exercise their right of first refusal, the shares may be sold to a third party. However, a pre-emption right allows them a second chance to acquire the shares before a third party can complete the purchase.
In restrictions on transfer, it should always be specified who and when can exercise a pre-emption right and how the share price should be determined. Additional provisions can be added optionally.
Voting restriction clauses
Voting restriction clauses entail shareholders being contractually obligated to vote uniformly or in a specific manner on certain decisions in the general meeting. This is aimed at avoiding deadlock. For instance, this may concern decisions regarding the percentage of profit distribution or the election of the board of directors. Such a contractual provision is permissible as long as it does not violate the law or imply vote-buying, which is prohibited.
Loyalty duty and non-compete agreement
Within a PLC, employees, executives, and members of the board of directors are subject to a contractually established non-compete clause. However, what about shareholders? They are not inherently included, as the non-compete clause is based on a different contract. Nonetheless, competition regulations can be included in a shareholders' agreement. Sensitivity is required in terms of duration, scope, and geographical orientation. Especially if the prohibition extends beyond the departure of a shareholder. While there should be clear provisions, the shareholder's freedom should not be entirely restricted.
Conclusion
The conclusion of a shareholders' agreement is not mandatory, but it appears sensible for most SMEs. It provides the opportunity to establish clear structures and rules among the shareholders. It also helps reduce or entirely avoid uncertainties and disputes. Since a shareholders' agreement is not subject to legal structures, it allows the parties a lot of design freedom on one hand. On the other hand, the crux lies in the fact that drafting it is very complex. Consulting with a specialized lawyer can be a strong support in this regard.
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FAQ: Shareholders' Agreement
Shareholders' agreements are generally reserved for PLC's. However, they are not mandatory. Nevertheless, it is sensible for most companies to conclude such a contract.
A shareholders' agreement regulates the rights and obligations of the contracting parties. These are the shareholders of a PLC. However, future or potential shareholders can also be considered. The company itself is not a party to the contract.
A shareholders' agreement must include all elements of a normal contract. The most important include the contracting parties, a preamble, the date or duration of the contract, and the severability clause. Apart from the formally prescribed contents, shareholders' agreements can be relatively freely designed and cover different topics.
In theory, this is possible, as no written form is required for this type of contract. However, some clauses commonly found in shareholders' agreements must be recorded in writing to be valid. In any case, the written form is recommended to prevent misunderstandings.
Many contracts of this type have a long term and are valid for up to 20 years. A commitment for an indefinite period is not permissible, so there must always be some form of limitation.
With this, the shareholders commit to voting uniformly or at least by majority in votes at the general meeting. Vote-buying is not permissible in this context.
In principle, shareholders are not subject to the same non-compete clause as employees and supervisors. However, corresponding clauses can be included in the shareholders' agreement. These should not be too strict depending on the situation and should not excessively restrict the shareholders' freedoms.