Shareholders’ agreement – for sale and purchase of a company

A shareholders’ agreement is an essential part of any transaction involving the sale or purchase of a company. This document regulates the rights and obligations of shareholders, the way the company is managed, as well as the rules for future transfers of shares and interests in the company. Its proper drafting is crucial to properly define the rights and obligations of shareholders (partners) in the company, including the rights to participate in the company’s decision-making and profits.

What is a shareholders’ agreement?

Shareholders’ agreement (or shareholders’ agreement and shareholders’agreement) is a document governing the rights and obligations of shareholders (or shareholders) in the management of a company. Unlike the articles of association or the memorandum of association, which are compulsorily published in the commercial register, the shareholders’ agreement is not published in any publicly accessible registers. Thus, the shareholders’ agreement often also contains certain agreements between the shareholders which are confidential in nature (for example, provisions on the amount of the pre-agreed purchase price in the event of future transfers of shares or stock between the shareholders). The parties to the shareholders’ agreement are in most cases the shareholders and also the company itself.

The importance of the shareholders’ agreement in the sale and purchase of a company

In the event of a sale of part of the shareholding in the company, or the entry investorwhich will result in the company having more than one shareholder, the shareholders’ agreement is one of the key transaction documents, the drafting and conclusion of which is a condition for the completion of the transaction. In addition to the basic terms of the share sale, such as the amount of the purchase price, its maturity or the scope of representations and warranties to be provided to the buyer (investor), the parties’ agreement on the scope of the rights and obligations of the shareholders in the company after the completion of the transaction is one of the main points of negotiation in the transaction. From the perspective of both the seller and the buyer (investor), the shareholders’ agreement is the key document governing the relationships between the shareholders with each other as well as the relationships between the shareholders and the company itself.

Why is a shareholders’ agreement important in corporate transactions?

The shareholders’ agreement is important primarily from the point of view of defining the scope of economic and decision-making rights of individual shareholders in the company. Practically speaking, from the seller’s (as well as the company’s) point of view, in addition to the amount of the purchase price for the business share (or investment), it is also crucial to assess the scope of decision-making powers that the buyer (investor) will have after acquiring a share in the company.

Key elements of the shareholders’ agreement

The shareholders’ agreement has the following key areas which it governs – primarily the composition and powers of the various bodies of the company, the restrictions and obligations relating to transfers of shares in the company as well as the range of matters which require a decision consent of the minority shareholder or investor (reserved matters) .

Shareholders’ rights and obligations

The scope of rights and obligations of shareholders (partners) is normally based on the size of their shares in the company. The number of votes of a shareholder at a general meeting, the possibility to nominate a member of the statutory body as well as the amount of the share in the profit (or liquidation balance) of the company usually corresponds to the ratio of the size of the shareholding held by them to the size of the shareholdings of the other shareholders. In some cases, however, the shareholders’ agreement also grants some shareholders so called. asymmetric rights – for example, the right to a preferential dividend or veto rights in relation to certain decisions that the other shareholders would otherwise be able to take without its consent.

Conditions and restrictions on the sale of shares

The shareholders’ agreement often contains a number of restrictions on transfers of shares and interests in the company. Sometimes this is a complete restriction on the transfer of shares during an agreed period of time (lock up period), other times it is a restriction in the form of pre-emption rights of other shareholders or various combinations of rights to transfer shares between shareholders (call option, put option). These restrictions do not normally apply to so-called permitted transfers, such as transfers to related companies controlled by the same shareholder or transfers to persons close to the shareholders.

Voting and decision-making rules

The shareholders’ agreement establishes the rules for calculating the minimum quorum (majority) required for the adoption of decisions within the competence of the individual bodies of the company, as well as the scope of the voting rights of individual shareholders. In most cases, these correspond to the size of the shareholder’s stake in the company, but sometimes they are also set asymmetrically in the form of the right to a preferential dividend or a veto right when deciding on a certain type of matter (reserved matters).

Contractual measures for the protection of minority shareholders

Beyond the legal rights granted to minority shareholders, in many cases the shareholders’ agreement grants minority shareholders (shareholders) additional rights, whether in the form of an extended right to information or the right to veto some of the fundamental decisions taken by the company’s bodies (reserved matters).

Clauses in the shareholders’ agreement

Unlike the articles of association or the articles of association, in relation to which the Commercial Code defines the mandatory elements and provisions they must contain, the shareholders’ agreement allows the partners (shareholders) to agree on a number of specific clauses regulating the rights and obligations of the shareholders, beyond the scope regulated by the Commercial Code.

Right of First Refusal

The pre-emption right is the basic restriction on the transfer of shares (business shares) in the company. In the case of an intended transfer of shares, the shareholder is obliged to offer his share for sale first to the other shareholders of the company on the same terms and conditions as those offered to him by the third party. If the other shareholders do not exercise their pre-emptive right, the shareholder is entitled to transfer his/her share to a third party under these conditions.

Mandatory Selling Clause (Drag-Along Rights)

A mandatory sale clause (or an obligation to join the sale) is another possible restriction on the transfer of shares. In a situation where shareholders holding an agreed amount of shares (usually at least 50%) intend to transfer their shares to a third party, they are entitled to require the other shareholders to also transfer their shares to that third party on the same terms. The addressed shareholders are obliged to comply with such a request in accordance with the terms of the shareholders’ agreement.

Mandatory redemption clause (Tag-Along Rights)

The compulsory purchase clause represents the right of a shareholder (or a designated group of shareholders) to require shareholders who transfer their shares to a third party to ensure that such third party (the transferee) also purchases, on the same terms and conditions, the shares of the shareholders with this right. In most cases, the shareholders’ agreement grants this right to minority shareholders.

The process of creating a shareholders’ agreement

In practice, the process of drafting a shareholders’ agreement usually takes place in two phases.

• The first is the conclusion of a non-binding agreement on the basic terms of the shareholders’ agreement (term sheet, LOI), which summarises the main provisions of the future shareholders’ agreement.
• On the basis of this non-binding agreement, the draft shareholders’ agreement itself is being prepared and negotiated in the next phase, reflecting these basic conditions in a detailed wording.

The most common mistakes when concluding a shareholders’ agreement

As the most common mistakes when concluding a shareholders’ agreement in practice, we first of all perceive the absence of a preliminary (non-binding) agreement on the basic terms of the shareholders’ agreement (term sheet, LOI), when negotiations on a straightforwardly detailed wording of the shareholders’ agreement without an agreement in principle on its basic terms are often more lengthy and complicated. Other common mistakes are provisions (clauses) agreed in the shareholders’ agreement that contradict statutory provisions or contradict provisions of the articles of association (articles of association) governing the same issue.

Advantages and disadvantages of a shareholders’ agreement when selling a company

The advantages of the shareholders’ agreement lie primarily in the possibility for the shareholders to regulate in more detail their mutual rights and obligations in the management of the company. Another advantage is undoubtedly the non-public nature of the shareholders’ agreement, which allows the shareholders to include, for example, more commercially confidential information in it. The only disadvantage is the higher complexity of the transaction documentation. However, this can be overcome with the help of experienced legal counsel with experience in drafting and negotiating shareholders’ agreements.

If you are interested in this topic, please do not hesitate to contact us:

• Tomas Demo, e-mail: tomas.demo@highgate.sk

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