A shareholders' agreement can be defined as follows: a private contract between shareholders aimed at determining their relationships and how the company in which they hold shares should be managed.

It should be noted that relations between shareholders are primarily governed by the articles of association and corporate law. These two frameworks apply to all companies and are often sufficient. A shareholders' agreement complements the law and the articles of association. It is therefore an optional contract, but a very useful one in certain cases.

Unlike the law and articles of association, a shareholders' agreement is private and usually strictly confidential. While this contract is binding upon the signing parties, it is not enforceable against third parties, nor even against the company whose shareholding structure it governs.

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A shareholders' agreement generally pursues two main objectives:

  • To establish an operational framework for the company and its shareholders;

  • To anticipate various scenarios involving changes in shareholding. 

These objectives are reflected in a number of clauses, which can naturally be tailored to meet the parties' specific wishes.

Here are the typical elements related to smooth operations:

  • Day-to-day management organization: delegation, signing authority (individual or joint). 

  • Board of Directors organization: composition, powers, meeting frequency, deadlock procedures.

  • Enhanced reporting for non-active shareholders. 

  • Compensation for active shareholders: operating principles, conflicts of interest, benefits in kind. 

  • Dividend distribution policy, incentive mechanisms for active shareholders. 

  • Non-compete and exclusivity clauses binding active shareholders. Scenarios involving changes in shareholding are numerous, and the clauses governing them are complex. Since the goal is to align shareholders' interests—which are inherently divergent—a balance must be found that satisfies everyone.

In business practice, certain clauses have become standardized over time. Anglo-Saxon in origin, they can be found in most agreements worldwide. Some are more typical when a financial investor (Private Equity) joins the capitalization table.

Here are the main clauses in this area:

  • Right of first refusal (ROFR) among shareholders: a standard clause, though its execution mechanisms can vary. 

  • Lock-up clause (standstill): shareholders agree not to sell their shares for a specified period. This helps stabilize the capital structure following an LBO. 

  • Tag-along right (co-sale right): if a shareholder sells their shares, the others can join the transaction on the same terms. This serves as a protection for minority shareholders.

  • Drag-along obligation (forced exit right): if a majority of shareholders wish to sell, the remaining shareholders must sell as well. The objective is to prevent being at the mercy of a small shareholder and to make the company saleable.

  • Guaranteed exit clause: one of the shareholders agrees to buy out the others at a predetermined price and agreed date. For example, this can reassure a minority shareholder planning their retirement. 

  • Strategic decision restriction clause (asset disposals, acquisitions, new debt, etc.) requiring a qualified majority or unanimity. Withdrawal clause: allows a shareholder to exit if specified events occur.

  • Exclusion clause: allows for the squeeze-out of a shareholder in serious, predetermined cases. Buy-or-sell clause (shotgun clause): Shareholder A forces Shareholder B to either sell their shares to Shareholder A or buy out Shareholder A's shares. This helps resolve deadlock situations.

  • Procedure in the event of death or incapacity. Anti-dilution clause: pre-emptive right granted to certain shareholders in the event of new share issuances (less common).

  • Adjustment clause (ratchet clause): a shareholder who paid too high a valuation can adjust their entry price if future shareholders enter the capital at a lower valuation.

It should also be noted that a shareholders' agreement must include a valuation mechanism. This mechanism may potentially be more generous for an amicable departure (good leaver) than for a forced departure (bad leaver).

As you can see, while a shareholders' agreement contains a series of standardized clauses, the subject matter is complex and filled with pitfalls. It is best to work with specialized lawyers who can not only guide you through the drafting process, but also assist each party in the event of a dispute.

A good shareholders' agreement aims to strike a balance between the interests of majority and minority shareholders, as well as active and non-active shareholders.

Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 19/11/2011. Published/updated version on the Fondaris website with the author’s permission.