The nine essential components for drawing up a shareholders’ agreement

In a private limited company, rules between the shareholders are laid down in the company’s articles of association. A flexible way to regulate the more business-related agreements between shareholders is to draw up a shareholders’ agreement. This agreement is often used when an investor or new shareholder joins the private limited company. But what are the essential components for drawing up a shareholders’ agreement?

What is a shareholders’ agreement?

A shareholders’ agreement is an agreement in which agreements between shareholders of a company are laid down. The agreement describes, among other things, the rights and obligations of shareholders. In addition, the agreement contains information about the decision-making process and describes other important aspects relating to the management of the company. These include the business plan and objectives of the company, as well as agreements about the capital and the way in which the company is managed.

The shareholders’ agreement also determines which agreements apply in the event of a shareholder dispute or conflict. The agreement usually also contains a voting agreement, which determines how shareholders’ voting rights are exercised.

Rights and obligations of shareholders

A shareholders’ agreement can contain agreements between all shareholders and the company. The agreement determines the rights and obligations of shareholders and may contain the consequences of non-compliance with agreements. Drawing up an agreement for shareholders is not mandatory. However, we strongly recommend that you do so. The agreement can prevent discussions and conflicts between multiple shareholders or within the company. Would you like to draw up a shareholders’ agreement or articles of association or have it reviewed by a shareholders’ agreement solicitor? Our solicitors specialising in corporate law are happy to assist you.

No personal liability for debts

You can collaborate without being personally liable for business debts by either setting up the collaboration in a private limited company (BV) or having your own BV act as a partner or associate in a partnership or general partnership (VOF). It is important to include agreements in the partnership contract about the contribution, the distribution of profits and how the partnership can be terminated (an exit arrangement).

Is a shareholders’ agreement mandatory?

Drawing up a shareholders’ agreement is not mandatory, but it is very important for determining and establishing clear frameworks within which all shareholders of a company must act. The information to be included in the agreement can be determined by each company. The parties involved decide for themselves which elements are to be laid down in writing. However, there are a number of prohibitions or legal exceptions.

No formal requirements

There are no formal requirements for a shareholders’ agreement. The parties can draw up the agreements themselves in the agreement. If desired, the agreement can be recorded in a notarial deed. A solicitor knows exactly what is possible when drawing up a shareholders’ agreement. It is quite conceivable that co-owners may wish to determine the rules regarding decision-making, termination of cooperation, shares and disputes themselves. The agreements in an agreement between the shareholders are therefore often more business-like than in the company’s articles of association.

Advantages of a shareholders’ agreement

A shareholders’ agreement has several advantages. Here are a few of them:

• Clear rules

A shareholders’ agreement sets out the rights and obligations of each shareholder. This provides clarity about the expectations and responsibilities of all parties involved.

• Escalation prevention

Because the agreement clearly sets out how conflicts should be resolved, this agreement between shareholders prevents conflicts from escalating.

• Management structure

Procedures relating to decision-making and the distribution of power within a company are set out in black and white. This ensures that the “day-to-day management” of a company runs smoothly and efficiently.

• Possibility of amendments

A shareholders’ agreement can be amended more easily than the articles of association. The consent of the shareholders who have signed the agreement is sufficient to amend the agreement.

Disadvantages of a shareholders’ agreement

Although drawing up a shareholders’ agreement is a sensible move in many cases, it is important to take a number of things into account.

• Complex

Drawing up a shareholders’ agreement is usually a complex and time-consuming process. It is advisable to engage a legal specialist to draw up or review the agreement.

• Limited decision-making

The agreement imposes restrictions on the decision-making powers of shareholders. This may mean that shareholders are limited in the choices they can make.

• Feasibility

In practice, compliance with or implementation of the shareholders’ agreement may prove unfeasible or complicated.

• Costly

There are costs associated with drawing up the agreement. Drawing up complex shareholders’ agreements in particular is usually a costly business.

These are the nine essential components

When drawing up a shareholders’ agreement, various factors and provisions must be taken into account. Every company is different, but every shareholder is also unique. This means that the agreement for shareholders differs for each company. It is very important that everyone’s wishes are listened to carefully when drawing up the shareholders’ agreement.

In addition, joining a private limited company is an important step and every shareholder is critical of the content of the shareholders’ agreement. When drawing up a shareholders’ agreement or amending the agreement between the shareholders, certain matters must not be omitted. Always check that the following components and provisions of a shareholders’ agreement are regulated:

• An exit arrangement

An exit arrangement is a strategy that describes how a possible departure or forced exit of a shareholder from the company is arranged. The arrangement sets out, for example, elements such as the obligation to offer shares, the valuation of shares and possible penalty discounts. In essence, an exit arrangement determines how shares are sold, to whom they are sold and within what period they are sold if a shareholder leaves.

• Valuation basis of shares

In order to calculate the value of shares, for example when purchasing a company, a valuation of the shares is required. Determining the value of shares is also necessary in the event of a shareholder’s possible departure. To avoid any misunderstandings, the shareholders’ agreement must include a valuation basis for shares. This valuation method prescribes how the value of shares is determined.

• Ordinary and qualified majority

A company’s articles of association specify the majority of votes required at a shareholders’ meeting to pass a resolution. The most common form of majority is the simple majority of votes: there are more votes in favour than against. For certain decisions laid down in the shareholders’ agreement or articles of association, a different voting ratio may be established, known as a qualified majority. For the adoption of these decisions, it is stipulated that, for example, two-thirds of the votes are decisive.

• Approval of management decisions

Determine which management decisions require the approval of the shareholders. In practice, this may concern decisions relating to a significant or radical change in the identity or character of a company.

• Tag-along and drag-along arrangements

When a shareholder sells shares, the other shareholders may or must sell their shares at the same price. The tag-along provision in the shareholders’ agreement protects the minority shareholder. In the event of a sale of shares, the minority shareholder is given the option to sell shares to the buyer of the majority shareholder’s shares, but is not obliged to do so. A drag-along arrangement gives a majority shareholder the power to oblige other shareholders to sell shares to the purchasing party in the event of a sale of shares.

• Obligation to offer and obligation to purchase

In addition to breach of contract or a dispute, it can be determined in which situations a shareholder must offer his shares to the other shareholders. Examples of such cases include death or permanent incapacity for work. If desired, a purchase obligation can also be included in the terms and conditions for shareholders. This obliges other shareholders to purchase the shares offered.

• Confidentiality clause

Unlike articles of association, a shareholders’ agreement can be kept confidential. The articles of association must be filed with the Chamber of Commerce and can be requested by third parties. In order to keep agreements confidential, a confidentiality clause is included in the agreement in practice. A confidentiality clause in the shareholders’ agreement sets out agreements in the event that cooperation between shareholders ends.

• Non-competition clause and relationship clause

A non-competition clause sets out the obligations of shareholders after termination of the shareholders’ agreement. This clause protects the BV against the leakage of competitively sensitive or important information about the business operations by a shareholder to a competitor.

The clause sets out matters such as the period during which a shareholder may not carry out activities for competing companies. Both the non-competition clause and the relationship clause may include provisions that prevent a departing shareholder from taking existing relationships to another (competing) company.

• Chain clause for successive shareholders

The chain clause ensures that a private limited company can hold successive shareholders and new shareholders to the obligations of the shareholders’ agreement. When shareholders sell their shares, the chain clause automatically imposes the terms of the agreement on new shareholders.

Agreements on profit distribution

Another important part of the shareholders’ agreement is profit distribution. Or rather: the agreements regarding profit distribution. This provision, also known as a dividend distribution, determines from which financial years profits will be distributed to a shareholder, which distribution key will be used for this, or whether profits will accrue to the private limited company.

Penalty clause in the event of a breach

A shareholders’ agreement is subject to contractual freedom. The parties themselves determine what matters they do and do not include in the agreement. And although this is usually done with the consent of all parties involved, it is possible that a provision may be violated. An action that is contrary to the agreements made may be included in the agreement in a provision that sets out the consequences of this: the penalty clause. The penalty clause increases the likelihood of successfully enforcing agreements. A breach of the agreements by a shareholder can be “punished” by means of this clause with a very high penalty, which can amount to £10,000 per day.

Want to draw up a shareholders’ agreement?

Are you going to work together in a private limited company? Then it is advisable to make and record further agreements in a shareholders’ agreement, so that there are clear arrangements in the event of, for example, a shareholder dispute. Would you like to part ways with a shareholder, but they refuse to cooperate? Then read the blog “50 ways to leave your shareholder”. Would you like to have a shareholders’ agreement drawn up or reviewed? Then engage a solicitor. For more information, please feel free to contact one of our specialists in corporate law.