Shareholders’ Agreement

Lay down arrangements with your fellow shareholders when entering into a partnership

If people are entering into a partnership via a private or public limited company, they should think in advance about any problems that might arise in the future. It is common practice for shareholders to stipulate mutual arrangements in a Shareholders’ Agreement. In short, the law and the Articles of Association of the private and public limited company contain basic rules. Shareholders can use the Shareholders’ Agreement to lay down arrangements to complement the Articles of Association and the law.

Why drafting a Shareholders’ Agreement in addition to the law and the Articles of Association?

• It is easer, faster and cheaper to draft and amend arrangements in a Shareholders’ Agreement than to amend the Articles of Association.
• Articles of Association must be filed at the Chamber of Commerce and are made public, whereas a Shareholders’ Agreement is a document that is only accessible by the parties involved.
• Sometimes, a Shareholders’ Agreement may deviate from the law or the Articles of Association. Such as, for example, the majority required for a resolution by the General Meeting of Shareholders.

Drafting a Shareholders’ Agreement

Drafting a Shareholders’ Agreement requires a tailor-made approach. That is why it makes sense to have a corporate law specialist draft a Shareholders’ Agreement.

Shareholders’ Agreements include arrangements, such as:

• the purpose of the partnership, the division of duties and any KPI’s;
• the distribution of profits (dividend payments);
• which incentives (positive and negative) are valid to ensure the continued commitment of the shareholders. It is possible that the company’s success depends heavily on (some of the) shareholders, because they are also a director or employee, for example. It is therefore recommended to develop an incentive to ensure shareholders continue to do their best. For example, if a shareholder or an employee shareholder ceases to work for the company or is acting in a culpable manner, they may be required to transfer their shares;
• in which other cases shares are required to be transferred (to the other shareholder(s)), such as in the event of death, illness or bankruptcy of a shareholder, non-compliance with the Shareholders’ Agreement, transgressive behaviour, loss of a certain quality, etc.;
• the price to be paid for the shares in the event of a compulsory transfer or if a shareholder wishes to leave in the company’s start up phase (the so-called good leaver and bad leaver provisions). It may be agreed in advance which valuation method should be used to determine the value of the shares. Provisions may also stipulate that a discount should be applied to the acquisition price of the shares during a certain period or under certain circumstances;
• what will happen if one of the shareholders wants to sell their shares; to whom must they offer their shares and for which amount;
• whether a minority shareholder is required to co-sell their shares when a majority shareholder wants to sell their shares to a bidder who wants to buy all shares (the so-called drag along right);
• whether a majority shareholder who is selling their shares is required to agree with buyer to also bid on the minority shareholder’s shares (the so-calledtag along right);
• whether and when a shareholder is required to pay an additional amount of capital, for example when the company’s solvency or liquidity drops below a certain value. If the shareholder fails to do so, they may be denied the right to subscribe for additional shares, diluting their interest.
• the right of particular shareholders to appoint particular directors and supervisory board members;
• which decisions of the Board are subject to the approval of the shareholders, such as certain expenses incurred by the Company from a certain amount;
• which information the Board must submit to the shareholders, such as KPI’s, quarterly reports, etc.;
• how a shareholder should exercise their right to vote, for example to implement a particular strategy;
• which decisions require a certain specific majority, such as dividend payments and the amount of the directors’ salary;
• the right of incumbent shareholders when shares are issued and when this right can be restricted by the majority of shareholders;
• the issue of shares to employees;
• (non)-competition;
• the shareholders’ obligation to take out an occupational disability insurance;
• a so-called entire agreement clause, in which shareholders stipulate that their interrelationships are only governed by the Shareholders’ Agreement (where appropriate jointly with specifically defined documents);
• which court is competent to decide in a dispute or a different dispute settlement, such as arbitration, binding advice, mandatory completion of a mediation process. With respect to disputes about a shareholder’s forced resignation and release, shareholders may agree that the Enterprise Chamber will immediately decide on their dispute rather than after a court hearing, in order to avoid lengthy litigation.

Drafting Articles of Association

The Articles of Association of a private or public limited company contain rules regarding the relations between shareholders: how and when are decisions taken, what decisions require a majority, etc. If the Articles of Association do not include a rule in this respect, the Dutch Civil Code contains general rules regarding the relations between shareholders.

It is recommended to properly align the provisions of the Shareholders’ Agreement with the Company’s Articles of Association, to avoid any ambiguity and contradictory arrangements.

Dispute: legal assistance by attorney

In case of a dispute between shareholders, the provisions included in a Shareholders’ Agreement shall play an important role. If a shareholder no longer complies with the arrangements laid down in a Shareholders’ Agreement, immediate action is desirable. The corporate law specialists of AMS Advocaten are specialised in drafting shareholders’ agreements. AMS Advocaten has ample experience in reviewing, drafting and litigating with respect to shareholders’ agreements. AMS works with short lines of communication and offers competitive rates.