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19 Jul 2016

As a startup, what provisions should I include in my shareholder's agreement?

A shareholder’s agreement (SHA) is a tailor-made document, which qualifies as a contractual agreement between parties, besides articles of association already constituting the parties’ agreement.

The main interest of a SHA is that it offers flexibility to shareholders within certain limits. Indeed, a SHA cannot contradict the corporate object of the company towards which it is linked, or violate the law or more attempt to circumvent rules provided in laws and regulations that are of public order.

The most prominent characteristic of a SHA is that it offers confidentiality.

In certain situations, besides all advantages that will be mentioned below, the parties intending to agree on very specific sensitive matters, requirement confidentiality, will favour the conclusion of a SHA to precisely regulate these matters instead of using the articles of association of the company.

Nevertheless, this advantage is directly counterbalanced by enforceability issues. Indeed, SHA are usually concluded between shareholders and investors holding a stake in the company potentially leading to enforceability issue (because of the confidentiality thereof per opposition to the articles of association that are publicly available). Therefore, a breach of contractual undertakings will end up before Court with most likely allocation of pecuniary sum of monies in case of damages. A recommendation is to include the company itself as party to the captioned SHA for sake of publicity between directly linked parties.

Another main advantage worth to be mentioned is the running costs for such kind of agreement which will not require any specific costs in the course of running and considering that it is a privately concluded agreement, any amendment is easily made, rapid and with no specific external assistance.

This introduction being made, what are the main clauses of a SHA? Typically, a SHA deals with many different issues and may have different goals, which are determined on a case by case basis. As a matter of fact, one of the most prominent aims is most probably the maintenance of certain degree stability in the company’s life.

Stability may be obtained in different ways impacting the corporate capital of the company: (i) organise the transferability of the shares, (ii) grant specific right to certain categories of shareholders, (iii) likewise provide for anti-dilution right in order to preserve the influence of initial shareholders, etc.

On the other hand, stability may as well be obtained by implementing corporate governance rules for the good and smooth functioning of the company. In this situation, a SHA may be compared to wedding agreement with two main goals, (i) regulating relationship between initial shareholders and investors (fixing the duties and rights, providing for different quorums and majority vote depending from the topics, creating reserved matters list, etc.) and (ii) providing for rules in advance addressing conflictual situations or in more complicated situations, the way for shareholders to leave the company in a manner not likely to negatively impact the valid functioning thereof. To this end, in case of departure, call and put option are envisaged while in case of sale drag-along and tag-along clauses shall be considered.

This being said, it must be clear that investors/shareholders are already well protected by the company law which offers basic general rules constituting the skeleton of an organisation whilst a SHA because of its flexibility shall go a step further by allowing the contracting parties to determine how they intend to be organised within the limits of the law.

Finally, a dedicated attention shall be made to the content of the SHA where shareholders' agreement, despite the confidentiality nature, shall be consistent with the constitutional documents; otherwise, the efficacy of such SHA can be undermined.

The conclusion is that the SHA is an extraordinary flexible instrument available for shareholders for all above mentioned goals, which has only two limits, (i) the scope provide by laws and regulations and (ii) imagination of the shareholders.

Question from Alice L. from Silicon