Key points
- A shareholders’ agreement is a contract governing relations between the shareholders and the company, supplementing the articles of association.
- Unlike the articles of association, which are public, the agreement remains confidential, which gives great flexibility in drafting.
- It aims to align the parties’ interests and protect minority shareholders.
- It may include pre-emption rights, a right of first refusal and a “tag-along” clause extending an offer to minority shareholders.
- Its clauses fall into financial and management clauses, share transfer clauses, voting right clauses and general clauses.
A shareholders’ agreement is a contract that governs the relations between a company’s shareholders and the entity itself. It specifies how the business operates, the shareholders’ rights and obligations, and the decision-making procedures. This document, very often used in small companies, aims to ensure fair treatment of shareholders and to protect their interests, in particular those of minority shareholders. Typical sections include the date of the agreement, the number of shares issued, a capitalisation table detailing the shareholders and their percentage holdings, and restrictions on share transfers. It may also provide, in addition to the statutory pre-emptive subscription right, for undertakings allowing current shareholders to subscribe for new shares to maintain their ownership percentages. The shareholders’ agreement often includes a right of first refusal clause, setting out how the company has the right to buy a selling shareholder’s shares before they are offered to third parties. Provisions on payments in the event of a sale of the company, the frequency of board meetings and the process for appointing board members or for their resignation are also common. As regards minority shareholders, clauses such as the requirement for unanimous approval of certain major decisions, or the “tag-along” provision requiring any purchase offer made to a majority shareholder to be extended to minority shareholders, protect their interests. These mechanisms aim to maintain a balance between shareholders, so that crucial decisions require consensus and financial opportunities are shared fairly.
A shareholders’ agreement, pacte d’actionnaires in French, is a private contract entered into between some or all of a company’s shareholders. This document supplements the company’s articles of association by governing relations between shareholders and their specific rights. Unlike the articles of association, which are public, the agreement remains confidential, which allows great flexibility in drafting.
Take an example: two co-founders wish to attract investors while keeping control over certain strategic decisions. They can call on a fundraising lawyer to draft a shareholders’ agreement. It will set out the specific clauses on their respective powers, thereby clarifying their future collaboration with the new investors.
The main aims of a shareholders’ agreement
Aligning interests
One of the main advantages of a shareholders’ agreement lies in the alignment of the interests of the stakeholders. Whether to protect the founders against excessive dilution of their shares or to give investors a say in the company’s key decisions, the agreement acts as a charter for peaceful relations.
Protecting minority shareholders
Minority shareholders can find themselves in a vulnerable position vis-à-vis the majority. The protective clauses included in the agreement make it possible to protect minority shareholders’ rights in terms of governance and exit. For example, a pre-emption clause may give existing shareholders priority to buy shares before they are sold to a third party.
What a startup shareholders’ agreement contains
Thanks to freedom of contract, the parties have wide latitude to choose the clauses to include. The main clauses fall into four categories: financial and day-to-day management clauses, clauses on transfers of shares, clauses on voting rights and general clauses. Financial clauses may include profit allocation and rights to subscribe for shares. Transfer clauses may include approval, lock-up and pre-emption clauses. Voting right clauses often include provisions for enhanced information and consultation. General clauses may include confidentiality obligations, penalty clauses and non-compete clauses. Agreements may vary according to the make-up of the shareholder base, sometimes including investors or employees with a stake in the capital. Each agreement is unique and must be carefully drafted to reflect the shareholders’ wishes and the company’s particular features.
Shareholders’ Agreement Clauses
| Type of Clause | Explanation | Advantages | Drawbacks |
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| Profit allocation clause | Determines how the company’s profits will be distributed among the shareholders. |
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| Approval clause | Share transfers are subject to the approval of the other shareholders or of a specific body. |
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| Lock-up clause | Prohibits the transfer of shares for a set period (in the articles of association of an SAS (simplified joint-stock company), ten years at most under Article L. 227-13 of the French Commercial Code (Code de commerce) (in French)). |
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| Pre-emption right clause | Existing shareholders have priority to buy the shares put up for sale by another shareholder. |
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| Confidentiality clause | Information relating to the agreement and the company remains strictly confidential. |
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| Non-compete clause | Shareholders undertake not to compete with the company for a given period after they leave. |
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| Buy-or-sell (shotgun) clause | In the event of disagreement, a shareholder may offer to buy the others’ shares or to sell its own. |
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| Anti-dilution clause | Allows shareholders to maintain their percentage of the share capital in the event of a capital increase. |
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| Drag-along clause | Allows majority shareholders to force minority shareholders to sell their shares in the event of an offer for 100% of the shares. |
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| Tag-along clause | Allows minority shareholders to sell their shares at the same price as the majority shareholders in the event of a sale. |
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Practical example: a tech startup
Imagine a tech startup in a phase of rapid growth. To structure the arrival of new financing properly, the founders draw up an agreement including liquidation preference clauses. If the company is sold, this clause allows investors to receive, in priority, all or part of their initial investment, up to the price obtained, before any distribution to the founders. Such a provision reassures potential investors.
SA vs SARL compared (public limited company vs private limited company)
When comparing public limited companies (sociétés anonymes, SA) and private limited companies (sociétés à responsabilité limitée, SARL), certain structural differences influence the drafting of the shareholders’ agreement. In an SARL, management is often more flexible and centred on one person or a small group, which makes certain clauses redundant. Conversely, the organisational rigour of an SA calls for detailed clauses covering various aspects of governance and capital transactions.
Why a shareholders’ agreement matters in a startup fundraising
Protecting the investment
For investors, a well-drafted agreement offers robust legal certainty, clarifying their rights and obligations from the outset. The transparency created by the agreement limits the risk of misunderstandings and future disputes. This peace of mind fosters a climate of trust conducive to calm negotiation.
Contractual flexibility
To respond to the varied contexts of fundraising, the agreement provides valuable contractual flexibility. Whether the aim is to encourage sequential investments or to adjust temporary voting rights, the agreement allows careful customisation suited to each company’s internal dynamics. Hashtag Avocats assists companies in this strategic process.
Stronger internal cohesion
By clearly defining everyone’s roles and responsibilities, the agreement helps strengthen internal cohesion. Members of the company know precisely what to expect, which removes grey areas. This internal clarification optimises collective performance, aligning all players towards a common goal: the company’s prosperity.
Case study: a biotech startup
Imagine a startup specialising in biotechnology that wishes to raise five million euros to advance its clinical research. The negotiated shareholders’ agreement includes anti-dilution clauses to protect the early investors. Specific agreements also govern the management of patents. As a result, investors see their contributions strengthened by these legal safeguards, which improves the chances of a successful fundraising.
FAQ
What is the role of a shareholders’ agreement?
The shareholders’ agreement governs relations between a company’s shareholders by defining their rights and obligations. It ensures harmonious management of the company and protects the shareholders’ interests, in particular in the event of disagreement. This document also offers mechanisms for strategic decisions and transfers of shares.
Which clauses of a shareholders’ agreement matter most?
The most important clauses include those relating to governance, such as the approval clause and the pre-emption clause. Non-compete and confidentiality clauses and exit mechanisms (tag-along and drag-along) are also essential to protect the shareholders’ interests and ensure transparent management of the company.
How do you terminate a shareholders’ agreement?
A shareholders’ agreement may end in accordance with the terms set out in the document, such as a fixed term or unilateral termination with notice. The parties may also jointly decide to end the agreement. Where it is of indefinite duration, each party may terminate the agreement in compliance with the general rules of contract law.
How do you draw up a shareholders’ agreement?
To create a shareholders’ agreement, the parties must draw up a private deed (acte sous seing privé) or a notarial deed (acte authentique), clearly defining the shareholders’ rights and obligations. It is advisable to consult a lawyer to make sure the agreement is complete and suited to the specific needs of the shareholders and the company.
What powers do shareholders have?
Shareholders have the power to vote at general meetings on important matters such as the approval of the accounts, the appointment of board members and amendments to the articles of association. They may also exercise specific rights defined in the shareholders’ agreement, such as pre-emption and approval rights.
How does a shareholders’ agreement work?
A shareholders’ agreement works by laying down clear rules for the management of the company and relations between shareholders. It includes clauses specifying the shareholders’ rights and obligations, the terms for transferring shares, and dispute resolution mechanisms. This document is essential to ensure effective governance and protect the interests of all shareholders.
Legal references
- French Commercial Code (Code de commerce) :
- Article L. 233-10: this article of the Commercial Code defines acting in concert, i.e. an agreement between persons to acquire, sell or exercise voting rights in order to implement a common policy towards the company or to obtain control of it. A shareholders’ agreement may amount to such an agreement.
- Article L. 225-197-1 et seq.: these articles deal with free share allocations (stock options fall under Articles L. 225-177 to L. 225-186), often referred to in shareholders’ agreements to retain employees.
- French Civil Code (Code civil) :
- Article 1101 et seq.: these articles of the French Civil Code (Code civil) cover contracts in general. Since 1 October 2016, Article 1128 has required the consent of the parties, their capacity to contract and lawful and certain content, conditions that apply to shareholders’ agreements.
- Article 1193: contracts may be amended or revoked only by mutual consent of the parties, or on the grounds authorised by law. The rule applies to the amendment or termination of a shareholders’ agreement.
- Articles 1210 and 1211: perpetual undertakings are prohibited, and a contract of indefinite duration may be terminated at any time, subject to the contractual notice period or, failing that, reasonable notice.
- French Monetary and Financial Code (Code monétaire et financier) :
- Article L. 225-209-2: this article allows the ordinary general meeting of an unlisted company to authorise the buyback of its own shares for limited purposes (employees, external growth, purchasing shareholders). A shareholders’ agreement may organise these buybacks.
- PACTE Act (Plan d’Action pour la Croissance et la Transformation des Entreprises) :
- Law No. 2019-486 of 22 May 2019: This law aims to modernise the legal framework for businesses and may include provisions relevant to shareholders’ agreements, in particular on corporate governance.
