Shareholders’ agreement, from entering to exiting a company’s capital

• Introduction and definition

The shareholders’ agreement (for joint-stock companies) or the partners’ agreement (for companies with shares) is a contract governing relations between several holders of a company’s securities (a generic term covering shares and company shares) (for the sake of simplicity, we’ll refer to them as shareholders for the remainder of this article). The purpose of this extra-statutory agreement is to avoid conflicts between its signatories, to fill certain gaps in the company’s articles of association, and to anticipate the entry into and exit from the company’s capital. The interest of this document lies in its confidential nature. In fact, only the signatories of the agreement have knowledge of it, and its provisions are unenforceable against third parties and shareholders not party to the agreement. It therefore differs from the Articles of Association, which are public and concern all shareholders, managers and third parties. However, in the event of a breach of the provisions of the agreement, the shareholder at fault is liable to pay damages, but the nullity of the deed is not always incurred, depending on how it is drafted. This means that certain clauses can be used to organize the terms and conditions of shareholdings and transfers, and to agree on governance arrangements throughout the life of the company.  

• Acquiring a stake in the company

One of the main aims of a shareholders’ agreement is to decide who will be able to acquire a stake in the company. To achieve this, the shareholders party to the agreement will make use of various legal mechanisms.

1. Approval clause if not contained in the bylaws

The approval clause stipulates that any transfer of shares is subject to the prior agreement of the other shareholders. This procedure can apply to the transfer of shares to a third party, as well as to a shareholder already present in the capital. As a result, the signatories will be able to decide on the entry of new shareholders into the company by making the transfer of shares conditional on the majority or unanimous agreement of the shareholders. The majority rules governing approval can be freely set by the shareholders who have signed the agreement.

2. Pre-emption clause

When a shareholder wishes to sell shares, the other parties to the agreement will benefit from a right of pre-emption (or preference) over the shares sold. The seller must give notice of the sale, and the other shareholders will have priority in acquiring the shares concerned. This mechanism makes it possible to prevent third parties from acquiring a stake in the company, and thus retain greater control over it. However, it is essential to clearly define the terms and conditions, specifying the transactions concerned, the notification of shareholders, the deadlines, the price conditions and the distribution of pre-empted shares (in the event that several shareholders wish to benefit from pre-emption).

3. Inalienability clause

Inalienability or non-transferability is a firm mechanism for managing the movement of shares, and therefore entry into a company’s capital: the transfer of shares is prohibited for a given period. There are limits, however, and inalienability clauses must be limited in time, in accordance with Article 900-1 of the French Civil Code. If the clause is not terminated, it may be null and void. You should also mention which shareholders in the agreement are covered by the non-transferability clause, the scope (total or partial) of the clause, the type of transfers prohibited and the exceptions.

4. Anti-dilution clause

When the company benefits from financing, notably by raising funds, the anti-dilution clause protects the shareholding of a shareholder by maintaining his or her capital holding. The aim is to preserve, as far as possible, the company’s original shareholder base and thus guarantee its stability. Indeed, the shareholder will have priority to subscribe to a capital increase if the company decides to issue new shares. However, they cannot prevent external financing if they are unable to subscribe to the capital increase.  

• During the life of the company

Managing the inflow and outflow of shares is important, but so is organizing relations between shareholders throughout the life of the company. To achieve this, the shareholders who are party to the agreement need to set out certain governance and control procedures.

1. Control bodies

In order to control the decisions to be taken by the company, the agreement may specify the conditions under which the company’s officers are appointed and dismissed, as well as the terms and conditions of their remuneration. It is always worth remembering that these provisions are only binding on the signatories to the agreement. As a result, the shareholders will undertake to take coordinated and similar decisions on these points, and will thus have greater latitude to “impose” their decisions. The agreement can and should also stipulate limits on the powers of the executive(s) and the type of decisions that can or must be controlled by a body, an ad hoc committee, set up for this purpose and enabling certain shareholders to have better day-to-day control, not just over a balance sheet situation.

2. Conflict resolution

It is essential to provide for the settlement of conflicts between shareholders who are signatories to the agreement. To keep relations as harmonious as possible, it is a good idea to provide for amicable methods of dispute resolution, such as mediation or conciliation.

• Planning your capital withdrawal

Last but not least, it is essential to plan how the company’s shares are to be sold, as this will affect the capital structure and hence the company’s stability.

1. Drag-along clause

This clause enables the forced transfer of shares. As part of a global sale of the company, shareholders (usually minority shareholders) are forced to sell their shares at the same time as everyone else. This avoids a situation in which certain shareholders prevent the sale of 100% of the company’s capital.

2. Tag-along clause

Minority shareholders will be able to join in the sale of majority shareholders’ shares. In this way, they can sell their shares at the same time and under the same conditions. This clause also makes it possible to avoid joining forces with a potential majority shareholder whom you have not chosen.

3. Good and Bad leaver clauses

These clauses generally concern shareholders with operational functions within the company: corporate offices, directors, members of the management board, etc. The bad leaver consists of “sanctioning” the shareholder who resigns from his position or leaves the company before the date stipulated in the agreement. The other partners will buy back his shares at a reduced price. There can be a host of different situations, allowing for bad leavers with very different discounts, medium leavers, etc. The shareholders’ agreement is therefore one of the most important documents, since it governs the fate of the shares held, much more so than the company’s articles of association. It is therefore essential to have it proofread by a professional. NMCG is at your disposal.  

• Shareholders’ agreements

Shareholding – Approval clause – Pre-emption clause – Anti-dilution clause – Inalienability clause   During the life of the company – Clauses relating to the distribution of powers of the company’s governing bodies – Clauses relating to voting rights: majority and quorum clauses, voting pact, blocking clause – Clauses relating to applicable law and dispute settlement (arbitration, mediation, conciliation) – Clauses relating to the protection of the company’s business (non-competition, non-solicitation and poaching) – Clauses relating to the distribution of profits – Confidentiality clause   Capital exit – Drag-along and tag-along clauses – Asset takeover clause – Good, medium and bad leaver clauses – Call or put option clause – Exclusion clause – Resignation clause