Shareholder Agreements play a pivotal role in ensuring the smooth functioning and sustained growth of companies. As businesses evolve and expand, having well-drafted and comprehensive shareholder agreements becomes indispensable for fostering transparent and secure business relationships. At the forefront of offering tailored legal support in this domain stands Spotlegal.io, led by esteemed attorney at law Olivia Marcu Iordanescu. With an acute understanding of the intricacies of shareholder agreements and corporate governance, Spotlegal.io is committed to providing personalized legal solutions that empower companies to navigate the complexities of equity and ownership structures. Through their expertise and dedication to excellence, Spotlegal.io serves as a trusted advisor, enabling businesses to establish equitable and transparent arrangements that facilitate successful collaborations and long-term growth.
In a separate article we explained how European Company Law generally works and how companies function (Corporate Governance), then we showed you how a company is owned – namely through Equity (shares and options) – to get you started on a solid corporate knowledge ground, as a founder or first-time shareholder.
In this article, we dig deeper into the specifics of shareholder agreements:
- Why are shareholder agreements important?
- Who should sign one?
- When should you sign a shareholder agreement?
- What is included in a shareholder agreement?
- How to prepare for signing a shareholder agreement?
- Why are shareholder agreements important?
The shareholder agreement is one of the most important agreements you will sign as a founder or first-time shareholder in a company. Here is why:
- It dictates key topics for the functioning of the company (which, as explained here, is the Corporate Governance of the company), such as:
- Composition of the board of directors
- Decisions which require shareholders’ approval
- Decisions which require supervisory (or non-executive) board’s approval (in two-tier board companies)
- Transfers of shares
- Groups of shareholders’ rights (majority vs. minority shareholders).
- If you don’t have one, then your company’s functioning will be governed solely by the applicable company law in the jurisdiction of incorporation/formation and the company’s constitutive deed or bylaws (which typically, is a basic template provided by the trade registry or companies house).
- You will not be in control of your vision, the reason you founded the company in the first place (if you’re a founder), or the reason why you agreed to invest in the company (if you’re an investor turned shareholder in the company) and ensure the alignment of all shareholders to steer the company into a specific, agreed direction
- You will run into conflicts or bare disappointment with your co-founders, other equity holders or even management team because you did not agree on termination terms, such as, what happens to the shares of a key individual who leaves the company
- Imagine you want to bring in an investor, but your co-founder opposes it and you can’t seem to see eye-to-eye, no matter how hard you’ve tried and how convinced you are this investment is beneficial for the company
- Stepping down from the executive board: even though founders will typically be a minority of the board after a few financing rounds, representation on the board might still be important and, as founders, you might still want to give input on decisions taken by the board
- Simplifying (in as much as allowed under statutory company law) the decision making process, including in respect to issuance of (new classes of) shares
- You, your co-founders, your investors are all from different jurisdictions, and so the shareholder agreement creates a level-playing field for all parties involved and ensures you’re all on the same page.
2. Who should sign a shareholder agreement?
Founders, minority and majority shareholders, prospective investors who wish to acquire shares in the company and become shareholders.
Shareholders agreements are private & confidential contracts signed between share-holders to deal with specific rights, obligations and rules that will govern the relationship between such title holders, as well as the functioning of the company, where the statutory company law provisions provide for basic things and you want to go further, or where they are completely silent, and, as such, you are allowed to private create the law (as parties/shareholders).
Since they are private (between the shareholders) & confidential, they will not be made publicly available (they do not need and are not registered or published in any way with the trade registry or company house), but rather, they are separate agreements only known to and applicable between the shareholders/parties thereto. This is also the reason why the company itself needs to be a party to such an agreement, so that the contract is opposable to the company, irrespective of who will own, run or have a claim against the company at any given moment in time.
To the question of whether option holders need to sign shareholder agreements, the answer is: typically, an option agreement will include an obligation for the option holder to sign an adherence document to the then existing shareholder agreement prior to, or upon exercising the option right, in order to become a shareholder in the company.
3. When should you sign a shareholder agreement?
The natural and inherent conflict of interests between majority and minority shareholders in a company will always exist. Statutory company law provisions have been created to this end: to protect the interests of the minority shareholders, to ensure a balance between the two shareholder categories, which at the end of the day impact greatly the success of the company.
You see, once a company is created, a separate legal personality is created, and this means primarily that “its” interests will differ greatly from those of its shareholders: while shareholders will pursue as main objective the return on their investment, the company itself has a larger objective to deliver to society. That it essentially should do so in a profitable manner, is of the essence of capitalism, but profits are not always the only objective: it may sometimes be to innovate, cause progress (whether technological or in another domain).
You will not be able to force a shareholder to sign an agreement, after you’ve issued the shares.
Therefore, shareholder agreements should always be signed prior to (simultaneously with):
- co-founding a company/upon its formation,
- issuing shares to an outside investor who becomes shareholder in the company, or
- transferring shares/acquiring shares in a company.
4. What does a shareholder agreement contain?
It is worth clarifying from the start that you cannot “contract out” of most statutory law provisions when it comes to European companies. However, statutory provisions, specifically some remedies afforded to shareholders under national laws, are time consuming and expensive (e.g. you have to summon a general meeting of shareholders which requires a certain quorum, a specific majority for decision-making, or you can challenge the general meeting of shareholders resolution in a procedure that goes through the courts).
Additionally, while the shareholder agreement is a private & confidential contract, some of its provisions will need to be incorporated in the company’s governing documents and by-laws for enforceability.
However, as a startup, you need to move fast & efficiently, and a shareholder agreement can help not only create a balance between minority and majority shareholders, but also pro-actively create rules regarding the decision-making process and the functioning of the company, while avoiding unnecessary (and costly) delays with shareholder disputes.
Typically, you would include in a shareholder agreement provisions which deal with:
- Board of directors composition
- Shareholder approval requirements
- Drag along/tag along rights
- Pre-emptive rights/ right of first offer
- Right of first refusal
- Repurchase rights
- Information rights
- Confidentiality, non-solicitation, non-compete covenants
5. How to prepare for signing a shareholder agreement?
Try as you might, you will not find a legal template for a shareholder agreement on our platform. The reason for this being, that company law is mostly filled with statutory or mandatory law provisions which need to be analysed and tailored into legal advice on a case-by-case basis. This article is merely an attempt to educate and raise awareness as to the importance of concluding shareholder agreements, however, in order to enter into one, we strongly advise that you do not attempt to use one from the world wide web or a friend (even if that friend is a lawyer). Instead, hire a qualified/licensed and experienced corporate attorney-at-law who can advise you and draft such a sensitive agreement for you.
Our team of professionals is here for you to assist you with your shareholder agreement and the right corporate strategy for your startup or company.