Reaching agreements with fellow shareholders a business owner
The articles of association of your BV include the formal rules and procedures for decision making. However, the articles of association will probably say very little about the substantive agreements you make with your fellow shareholders. Despite this there will obviously be plenty of issues that you will need to be agreed upon if you own a BV collectively with other entrepreneurs. A good means of achieving this is via a shareholders’ agreement. What does such an agreement consist of?
What is a shareholders’ agreement?
A shareholders’ agreement is an agreement between the shareholders of a company. The shareholders’ agreement is – in contrast with the articles of association – a private matter. The shareholders’ agreement is confidential, while the articles of assocation are available to any person through the Trade Register. The articles of association can be accessed and downloaded via the Chamber of Commerce website. This document is therefore not suitable for any agreements or procedures that should remain confidential.
There are formal rules that must be followed in order to implement any decision to amend the company s articles of association. Often a unanimous decision of all shareholders at a general meeting is a prerequisite for such changes.
If a shareholders’ agreement has been made, such obstacles generally do not play a role: The shareholders can easily amend the text of the agreement and confirm those changes with their signatures and in this way establish valid changes to the agreement.
What does a shareholders’ agreement contain?
A shareholders’ agreement can include important financial, strategic and commercial agreements between shareholders.
This might mean the business plan is included, or a procedure for who determines company policy and what conditions apply to a shareholder exit, or profit sharing. The most common topics are explained below:
The following questions are often significant:
– Who determines the policy if two or more shareholders have equal share ownership?
– How are voting rights determined?
– What is the procedure if votes are refused?
Agreements concerning the power to nominate and appoint directors are also typically matters that are determined in a shareholders’ agreement. The powers and responsibilities of the directors can also be codified, and management responsibilities can be specified in more detail.
Furthermore, the different responsibilities of the directors as far as providing shareholders with information can be detailed. For example: access to financial records upon request.
Business plan & budget
It is recommended to set out agreements regarding strategy and company financing in a shareholders’ agreement, as opposed to filing them in separate ‘discussion documents’ or emails.
In this way it is completely clear to everyone which agreements apply. There is one ‘central’ location for all valid agreements.
Statutory law and the articles of association include formal procedures regarding the sale of shares. These procedures often lead to problems. For example: The mandatory procedures in the articles of association have to be complied with, but the stipulated deadlines in the articles of association turn out to be unrealistic, or the parties are unable to reach agreement concerning the appointment of experts which have to decide on the share valuation in accordance with such mandatory procedure.
A shareholders’ agreement is a more suitable document for detailed agreements on such matters. Establishing a procedure for specific valuation and payment methods for the shares are examples of items that can be included in the shareholders agreement.
Tag along and drag along
A shareholders’ agreement also offers the possibility of establishing tag along or drag along arrangements.
A tag along protects minority shareholders. If the majority shareholder chooses to sell their shares, the minority shareholder has the right to sell their shares on the same terms.
A drag along protects the majority shareholder. If the majority shareholder finds a suitable buyer for the business, he can demand that the minority shareholder sells their shares, ensuring that the entire share capital can be offered to the buyer.
Accession of new partners
Shareholders can use the shareholders’ agreements to stipulate the process for introducing new shareholders.
The articles of association usually contain little more than the formal rules for issuing new shares, whereas a shareholders’ agreement can make it easier to restrict or define which parties are considered eligible for accession to the partnership. In this way accession can be prevented or conditions can be set regarding what sort of interested parties are eligible as shareholders.
A shareholders’ agreement can also include detailed voting agreements. A voting agreement can for example define how the shareholders will vote regarding certain subjects, or that the opinion of an appropriate expert should be followed when casting their vote. For example, it might be agreed that the nomination and appointment of directors should be executed in a way that ensures that shareholders are equally represented on the board.
Drawing up a shareholders’ agreement
Make sure that you are well informed before drawing up a shareholders’ agreement. This article presents only a selection of the many important issues that should be considered in a shareholders’ agreement. The potential legal complications should be considered before a shareholders’ agreement is entered into.Our corporate law specialists are happy to assist you.