A shareholders’ agreement is a key legal tool when multiple parties (founders, managers, investors) share ownership of a company, particularly in an LBO transaction. It supplements the articles of incorporation and serves to establish clear ground rules to avoid gray areas when interests diverge.

In practical terms, it helps define the framework for governance, information rights, share transfers, and, above all, sensitive scenarios (the entry of a new investor, the departure of a partner, or an exit).

The goal is simple: to secure the relationship over the long term, without creating a document that is too one-sided or impossible to enforce.

Drafting the Shareholders’ Agreement

The agreement often includes specific clauses designed to structure the exercise of power within the company, control capital dilution, retain key executives, and plan for investors’ exits. Before beginning to draft the agreement, it is essential to identify which points are non-negotiable and which are open to discussion.

Furthermore, anticipating adverse scenarios—such as the departure, disability, or death of a shareholder—is essential to ensuring the company’s stability and guaranteeing that no key provisions are omitted.

When drafting a shareholders’ agreement, it is important to ensure that it strikes a balance among the signatories and does not create tension. Above all, it must serve as a tool for bringing shareholders together and reconciling their divergent interests.

It is essential to avoid including clauses that are too rigid or restrictive, as they can be counterproductive and lead to disputes. It is also important to establish clear procedures for each issue addressed to minimize the risk of misinterpretation or dispute.

A shareholders’ agreement is generally structured around four main categories of clauses:

General Provisions

These clauses form the foundation of the shareholders’ agreement and are essential for its proper execution. They define the terms of the agreement and provide clarity in its wording, thereby minimizing the risk of disputes.

• Definitions: To avoid any ambiguity or legal uncertainty, terms frequently used in the agreement are precisely defined.
  
  
  
• Shareholder Agreement Joinder Clause: When shares are sold or transferred, the new shareholder is required to comply with the pre-existing shareholder agreement. This ensures that all shareholders are bound by the same rules. 
  
  
  
• Confidentiality clause: The information contained in the shareholders’ agreement, as well as that relating to the company, is strictly confidential. This clause is particularly crucial when corporate investors acquire an equity stake, to prevent the startup’s technology or processes from being used to the corporate investor’s advantage.
  
  
  
• Agreement Administration Clause: Specify who is responsible for centralizing notifications, requests for approval, preemptive rights procedures, etc. This should be determined on a case-by-case basis, depending on the powers actually granted and how they align with record-keeping and transaction orders.
  
  
  
• Representations and Warranties Clause: Shareholders provide representations and warranties regarding the company’s financial condition and their capacity to enter into the agreement, generally for the benefit of investors.
  
  
  
• Jurisdiction and Governing Law Clause: Shareholders may define the law applicable to the agreement as well as the court with jurisdiction to resolve disputes, subject to limitations as appropriate. 
  
  
  
• Penalty clause: This clause provides for penalties in the event of a breach of the agreement (damages, buyback mechanisms, etc.), to be proportionate to the breach.

Clauses relating to corporate governance and operations

Clauses relating to corporate governance and operations are essential to ensuring harmonious and balanced management. It is crucial to avoid any imbalance between seasoned investors and less experienced founders, thereby allowing the CEO to set boundaries and prevent decisions—particularly operational ones—from being imposed on them.

• Establishment of a supervisory body: formation of a committee or supervisory board to pre-approve major decisions.
• Enhanced reporting and information: a periodic reporting system with defined content and frequency, along with confidentiality rules.
• Financing: financing commitments (or lack thereof), current account advances, additional tranches, and trigger conditions.

Provisions Regarding Changes in Share Capital

These provisions aim to control the capital structure and protect existing shareholders by limiting or prohibiting certain transfers of shares in specific situations. In particular, it is essential to include exit clauses to manage investor departures. These clauses require a detailed understanding on the part of management of the various classes of shares and their associated rights.

• Approval clause: Share transfers require the approval of the shareholders or a designated body, preventing third parties from acquiring shares without prior consent. 
  
  
  
• Right of first refusal: If a shareholder wishes to sell shares, the other shareholders have the first right to purchase them. The clause must be precisely defined (price, deadlines, notice, exceptions).
  
  
  
• Restriction on Transfer or Inalienability: The transfer of shares may be restricted for a specified period. The validity and exact conditions depend on the context (shareholders’ agreement vs. articles of incorporation, corporate form, proportionality). 
  
  
  
• Tag-along right: If shareholders sell their shares, the beneficiaries of this clause may also sell their shares under the same terms.
  
  
  
• Drag-along right: Certain shareholders may compel other shareholders to sell their shares to a third-party purchaser, under the same price and treatment terms, in the event of a significant or total sale. The triggering conditions (threshold, minimum price, required majority) must be specified in the agreement.
  
  
  
• Anti-dilution: A mechanism that provides economic protection to the investor in the event of a new funding round at a lower valuation (down round), by adjusting the investor’s conversion price or number of shares. There are two main variants: the full ratchet (full protection, highly favorable to the investor) and the weighted average broad-based (proportional adjustment, more balanced and far more common).
  
  
  
• Investment Priority: Priority to make a new investment (with the option to decline).
  
  
  
• Ratchet: a mechanism for adjusting investors’ equity stakes based on actual performance. If the exit valuation (or an interim valuation) is below a target threshold, investors receive an additional portion of the capital, typically at the expense of the founders. Conversely, some ratchets provide for a symmetrical mechanism if performance exceeds targets.
  
  
  
• Liquidity or exit clause: an exit mechanism triggered after a certain period or event.
  
  
  
• Initial Public Offering (IPO ): a specific liquidity clause providing for the organization of a future IPO.
  
  
  
• Change of control: If a shareholder (a legal entity) undergoes a change of control, it must sell its shares in accordance with the stipulated terms.

Key Person Clauses:

These clauses target certain shareholders who perform essential operational functions within the company, imposing obligations on them or granting them specific rights.

• Operational Functions: Clearly defined roles and positions.
• Exclusivity clause: a commitment to devote one’s professional activities exclusively to the company (to be tailored and approved).
• Non-compete clause: a commitment not to engage in competing activities, either during or after employment, subject to certain limitations (duration, scope, proportionality). 
• Good Leaver/Bad Leaver Clause: a buyback mechanism in the event of departure, with a possible discount depending on the circumstances.
• Capital participation clause: profit-sharing mechanism (AGA, BSPCE, etc.), to be coordinated with employee share ownership documentation.

Scope of the Agreement

Unlike the articles of incorporation, the shareholders’ agreement is a private contract that is binding only on its signatories. Consequently, it is generally unenforceable against third parties, meaning that the obligations and rights stipulated in the agreement cannot be imposed on those who have not signed it.

In the context of a company with numerous investors, it may be prudent to limit the inclusion of all investors in the main agreement. A practical approach is to create separate “mini-agreements,” reserving the main agreement for the founders and a small group of key investors, while employees and small business angels are included through separate agreements. This strategy allows for the effective management of relationships among the various stakeholders while maintaining the confidentiality and flexibility of the shareholders’ agreement.

The Limitations of Shareholder Agreements

Extra-statutory agreements offer considerable flexibility in defining relationships among shareholders while maintaining confidentiality. However, this freedom comes with certain limitations:

• Non-enforceability against the company and non-signing third parties: the company and non-signing third parties are not obligated to honor the commitments made in these agreements, except in specific cases.
• Enforcement of obligations: Depending on the obligations and the circumstances, enforcement may be subject to debate.
• Risk of reclassification: Certain provisions may be challenged if they are inconsistent, disproportionate, or poorly drafted.
• Term of the agreement: The term must be defined. An indefinite term may allow for termination in accordance with the stipulated terms.
• Compliance with the Articles of Incorporation and the law: A shareholders’ agreement must under no circumstances conflict with the company’s Articles of Incorporation or the law.

Conclusion

Careful drafting of a shareholders’ agreement is essential during an LBO transaction. This document plays a key role in structuring relationships among shareholders, defining their rights, and preventing potential conflicts.

It is essential to include specific provisions in the articles of incorporation or in the shareholders’ agreement to ensure smooth management and avoid any future ambiguity.

Sources

1. Bpifrance Création — “Shareholders’ Agreement: Organization and Operation”
   
   
   
2. Légifrance — Commercial Code — Article L227-13 (non-transferability of shares in an SAS, maximum term of 10 years)
   
   
   
3. Légifrance — Commercial Code — Article L227-14 (prior approval in an SAS)
   
   
   
4. Légifrance — Commercial Code — Article L227-15 (invalidity of transfers in violation of articles of association)
   
   
   
5. Légifrance — Civil Code — Article 1193 (Amendment/Termination of a Contract by Mutual Consent)
   
   
   
6. Légifrance — Civil Code — Article 1221 (specific performance)