Shareholders’ Agreement: Make arrangements well in advance

• Contracts
• Corporate, Company Law
• Private Clients
• SME

Legislation has structured the public limited company on a capital basis, and the only obligation imposed on shareholders personally is the obligation to pay up their shares. Beyond that, shareholders cannot be bound by the articles of association.

It is therefore advisable, particularly where there are close personal ties between shareholders (e.g. in family-owned businesses) or in smaller companies, to set out the respective shareholders’ obligations and rights in a shareholders’ agreement. In particular, a change in share ownership resulting from the sale of shares or the death of a shareholder can have serious consequences for a company. A shareholders’ agreement allows provisions to be put in place at an early stage to protect the company and the remaining shareholders. In addition, the shareholders’ agreement may include provisions concerning the organisation of the company and the exercise of voting rights. The agreement should also set out, as comprehensively as possible, the consequences of a shareholder’s departure.

General information

The shareholders’ agreement governs the rights and obligations of the shareholders amongst themselves, though it rarely involves the company itself. It covers matters not already stipulated by law or the articles of association.

The shareholders’ agreement is not governed by the law. The terms it may contain are subject to the principle of freedom of contract and are only limited by statutory provisions.

Typical elements of a shareholders’ agreement include:

• Rights of first refusal or takeover rights, or restrictions thereon
•  Co-sale rights or obligations
• Exercise of voting rights and proxy voting
• Provisions concerning the organisation and financing of the company, as well as a dividend

policy

• Composition of the board of directors
• Obligations to perform and obligations of non-interference between the shareholders and the company (e.g. confidentiality obligations and non-competition clauses)
• Contractual penalties
• Dispute resolution (e.g. arbitration clauses), etc.

Withdrawal of a Shareholder

A typical provision in a shareholders’ agreement concerns the withdrawal of a shareholder. Where there are close personal ties (e.g. in family-owned businesses or where individuals have a strong influence on, or the business is heavily dependent on certain persons), the withdrawal of a shareholder can have far-reaching consequences, including financial ones. Shareholders therefore have an interest in defining, right from the outset (either at the time the company is incorporated or upon a subsequent acquisition of shares), the conditions under which a shareholder may withdraw later. Shareholder agreements can be used to agree on the following safeguards for the company and the remaining shareholders:

Call option and put option

Call options and purchase rights constitute an important safeguard. In the event of a shareholder leaving the company, existing shareholders have the right to take over or purchase the shares of the departing shareholder (known as a call option), whilst the departing shareholder has the right, subject to certain conditions, to sell the shares they hold (known as a put option). Furthermore, it may be agreed at what price such shares are to be sold to the remaining shareholders. In most cases, the purchase price is determined based on the company’s value at the time of the shareholder’s departure. In this context, it may be agreed that the share purchase price will be reduced should a shareholder leave earlier than intended (known as a ‘bad leaver’ event).

Co-sale rights and obligations

The shareholders’ agreement may also stipulate that, in the event of a shareholder’s withdrawal, the other shareholders may, under certain conditions, be entitled or even obliged to sell the shares they hold alongside that shareholder. This may be the case, for example, if a majority shareholder leaves the company and the company as a whole shall be sold to another company. In such cases too, provisions are usually included regarding the price at which such shares may or must be sold.

Non-competition clause

Another protective mechanism commonly found in shareholder agreements is the non-competition clause. Through a non-competition clause, the shareholders act in the interests of the company to ensure that departing shareholders are not permitted to compete, either directly in their own capacity or indirectly (e.g. via shareholdings or fiduciary relationships), for a specified period, within a specified geographical area and in a specified business sector.Treuhandverhältnisse) konkurrenzieren dürfen.

Effect and Duration

The shareholders’ agreement is effective only between the contracting parties. This means that the scope for imposing the contractual obligations under the shareholders’ agreement on purchasers of shares is limited.

When determining the term of the agreement, the parties are free to do so within the limits set by law. A fixed term (often 5–15 years) allows the parties to review an existing shareholders’ agreement from time to time to assess its continued relevance in the context of the company’s ongoing development, and to negotiate a possible extension of the agreement and its adaptation to current circumstances.

Breach / Dispute Resolution

As already mentioned, shareholder agreements also serve to define key internal processes and the organisation of a company through contractual provisions. Such provisions help to prevent disputes. Should differences nevertheless arise, it is worth providing for mechanisms in shareholder agreements that set out what is to be done in such cases (e.g. deadlocks in voting).

If the agreement defines obligations on shareholders to perform certain acts and/or to refrain from certain acts, and if shareholders breach these obligations, contractual penalties may be agreed for such cases. As part of the dispute resolution framework, the parties may provide for the inclusion of for example mediation clauses. Dispute resolution clauses may also stipulate that disputes are to be resolved swiftly and definitively by an arbitral tribunal.

We would be happy to assist you with any queries or with the customisation of shareholder agreements.