A shareholders agreement is written when relations are good and read when they are not. Almost every dispute between shareholders turns on a question the agreement either answered clearly, in which case there is no dispute, or left open, in which case the agreement is the argument rather than its resolution. The quality of the document is measured entirely by how it performs in the second situation, which is precisely the situation nobody wants to imagine while drafting it.
Control has to be defined, not assumed
The first thing an agreement must settle is who decides what. Ordinary business decisions belong to management or the board; fundamental decisions, issuing shares, taking on debt, selling the business, changing its nature, related-party transactions, belong to the shareholders by a defined majority. The list of reserved matters is where the real negotiation sits, because it defines the boundary between running the company and controlling it. A list that is too short leaves a minority exposed; one that is too long makes the company ungovernable.
Deadlock is not an edge case
Two shareholders with equal rights and no deadlock mechanism have built a company that can freeze permanently, and equal ownership is common. The agreement needs a route out: a buy-sell provision, an escalation to named individuals, an expert determination, or an agreed sale. Any mechanism is better than none, because the alternative is a court, which is slow, public and rarely produces the outcome either side wanted. We deal with the same problem in the investment context in our note on co-investment and club deals.
An agreement is not tested when everyone agrees. It is tested at the one meeting where they do not, and everything else in it is preparation for that meeting.
Transfer and pre-emption
What happens when a shareholder wants out, dies, or wants to bring in a third party. Pre-emption rights, giving the others the first opportunity to buy, are standard and important, but the mechanism has to include a way of setting the price, because a pre-emption right with no agreed valuation method is a right to argue. Drag-along and tag-along provisions, which respectively force a minority to join a sale and allow it to, are what make the company sellable as a whole, and their absence can trap all the shareholders in an asset none of them can exit.
Funding the next round
Companies need more money, and the agreement should say what happens when they do. If one shareholder will not or cannot fund, the consequence, dilution, a loan on defined terms, a shift in control, has to be agreed in advance. This is among the sharpest provisions in any agreement because it is where a difference in financial capacity becomes a difference in control, and it is far better negotiated in the calm of drafting than in the pressure of a funding gap.
The agreement and the articles have to agree
A shareholders agreement is a contract between the shareholders; the articles of association are the company’s constitution and bind third parties. Where they conflict, the result is confusion and litigation. In a Dutch structure the interaction between the agreement and the statutory framework of the BV has to be handled deliberately, and it connects to the governance design we describe in our note on governance design in Dutch holding companies. The two documents should be drafted together, by people who have read both.
Which law, and where disputes go
For a cross-border group, the agreement has to state which law governs it and where disputes are resolved, and those choices have consequences for enforcement that we deal with in our note on governing law and jurisdiction in cross-border contracts. A shareholders agreement silent on these points is an agreement whose most basic question, which court, is itself a dispute waiting to happen.
Montclare coordinates the legal architecture behind cross-border structures, working with counsel in each relevant jurisdiction to one design. Our services are set out on our services page.
This article is informational and does not constitute legal advice. The law differs by jurisdiction and the treatment of any matter depends on its facts. Each engagement is subject to scope and applicable regulation.