Shareholders’ Agreements – Legal Advisory on Members’ and Shareholders’ Agreements

What is a shareholders’ agreement and what type of cooperation does it cover?

The members of a company (or a certain group of members) may regulate their mutual legal relationships concerning the company not only within the framework of the articles of association, but also in a separate agreement (commonly referred to as a shareholders’ agreement, joint venture agreement, or members’ agreement). The primary reason is that the articles of association, as a document to be filed with the Court of Registration, becomes publicly available, whereas such background agreements on cooperation do not become known to third parties.

A shareholders’ agreement may serve to regulate the rights and obligations of the members in detail, provide for changes triggered by certain conditions, and set a structured framework for situations where the relationship between the parties deteriorates or unforeseen circumstances arise.

Advantages of a shareholders’ agreement, and statutory limitations and risks

A shareholders’ agreement can be highly beneficial in many cases. However, it is essential to emphasize that, unlike the articles of association, as a binding document under corporate law, a shareholders’ agreement is “only” a contractual agreement between the parties. Its enforceability is therefore more limited, and a breach of the agreement does not render invalid a conduct of a member that complies with the articles of association but at the same time breaches the shareholders’ agreement.

This is why the preparation of a shareholders’ agreement requires particular care and the establishment of an adequate, independent and legally enforceable sanction system that sufficiently incentivizes all parties to comply.

Certain matters cannot validly be regulated in a shareholders’ agreement (e.g., in the case of companies limited by shares, restricting or subjecting the transfer of shares to company approval), and the mandatory rules of the Civil Code governing business associations may not be derogated from by the parties even in this framework. Furthermore, consistency between the articles of association and the shareholders’ agreement must always be ensured.

Since the adequacy of such agreements is often revealed only in the event of disputes, it is crucial that they are drafted by experienced experts by applying well-designed sanction mechanisms.

RSM’s legal services related to shareholders’ agreements

Our legal advisory team has extensive experience in drafting, tailoring, and preventing disputes relating to shareholders’ agreements. We support our clients, among others, in the following areas:

• elaborating sanction systems (advice on conditions related to contractual penalties, damages, withholding, and sanction-based put or call options);
• defining milestones for company operations and advice on legal consequences linked to their achievement;
• setting out obligations regarding capital contributions or other member contributions, and recording rules for calculating investment balances;
• structuring financing arrangements necessary for company operations and agreements for covering losses or investments, including member loan structures;
• regulating capital increase rounds, entry of new investors, and dilution;
• determining rights relating to exit and buyout;
• defining preference rights (preferential voting rights, liquidation preference, dividend preference, etc.) and veto rights;
• advice on voting deviation, matters reserved to the competence of the supreme body, introducing special voting majorities, and voting agreements;
• provisions regarding the appointment, removal, and remuneration of executives;
• establishing corporate bodies, boards, or committees not specified by law, and defining their competences;
• drafting provisions on conflict of interest, confidentiality, non-compete obligations, and data provision;
• defining rules for granting equity participation to employees and key personnel (Employee Stock Ownership Plan, ESOP);
• provisions on intellectual property relating to the company’s operations;
• minority protection rules;
• developing deadlock provisions and buyout structures (buy-me-buy-you, Russian roulette, Dutch auction, etc.), drag-along and tag-along clauses, as well as lock-up periods;
• regulating transfer restrictions and pre-emption rights;
• defining dividend rules;
• drafting service, management, and operational agreements provided to the target company;
• competition law advisory in case of antitrust implications;
• advice on applicable law and jurisdiction / arbitration clauses.

Why RSM?

• Business focus: we provide solutions tailored not only from a legal but also from a business perspective.
• International background: experience in cooperation with multinational companies, investors, as well as domestic large corporations and SMEs.
• Practical expertise: numerous successfully completed transactions and operating partnership agreements.
   

Get in touch with our experts!
 

Request a consultation and we will help you design a shareholders’ agreement that ensures the long-term stable and transparent operation of your company.