Shareholders' agreements: what they are for and what they govern

The articles of association define the company’s official rules. But between the partners there are often agreements that the articles do not contain and should not contain: who joins and who leaves, what happens if someone wants to sell, how key decisions are voted on. These agreements are called shareholders’ agreements (or agreements between shareholders). Let us look at what they are for and why, when there is more than one partner, they are almost always necessary.

What they are, in practice

The shareholders’ agreement is a contract between the partners — not between the partners and the company. It lives alongside the articles of association, but on a different level:

• The articles of association are public (filed with the commercial register) and bind the company and all partners, present and future.
• The shareholders’ agreement is private, confidential, and binds only those who sign it.

This distinction has an important practical consequence: the agreement produces binding effects between the parties, but as a rule has no direct effect towards third parties or towards the company. If a partner breaches the agreement, the act towards the third party may remain valid; what is triggered is the contractual liability of the defaulting partner. This is why well-drafted agreements provide for penalties and enforcement mechanisms.

What they typically govern

A good shareholders’ agreement steps in where the articles are silent or too rigid. The recurring contents are the following.

Circulation of shares

• Pre-emption right: before selling to an outsider, the partner must offer their shares to the other partners.
• Lock-up: a ban on transferring shares for a set period, typical in start-up phases.
• Right of first offer: a more flexible variant of pre-emption.

Exit and liquidity events

• Tag along (co-sale right): if the majority partner sells, the minority partners can join the same sale on the same terms.
• Drag along (co-sale obligation): the majority can compel the minority to sell together, so as not to derail a transaction on the whole company.

These are the two most important clauses when an investor comes in: they protect, respectively, the minority and the possibility of closing an exit.

Governance and voting rights

• Voting agreements: how the partners undertake to vote on appointments, capital increases, distribution of profits.
• Appointment rights for members of the board of directors or managers.
• Reserved matters: decisions that require qualified majorities or the consent of certain partners (vetoes).

Financial commitments and non-competition

• Future financing obligations, rules on dividends, non-competition and confidentiality clauses.

Why the articles of association are not enough

The question is legitimate: why not put everything in the articles? For three reasons.

1. Confidentiality: the articles are public. The economic conditions between partners, the penalties, the voting agreements are better kept private.
2. Flexibility: amending the articles requires a general meeting and a notarial deed. An agreement is amended by the consent of the parties.
3. Legal limits: some contents (for example certain voting agreements or economic commitments between partners) cannot go into the articles, but are valid in an agreement.

The flip side is that the agreement, being a contract, has only binding force between the parties. This is why it must be drafted carefully: define precisely the events that trigger the clauses, provide for credible penalties and coordinate the agreement with the articles so that they do not contradict each other.

When it is really needed

The shareholders’ agreement becomes essential in some typical situations:

• companies with several partners and unequal shareholdings;
• the entry of an investor or a financial partner;
• founding partners who want to protect the project and govern exits;
• generational handovers and reorganisations of the shareholding structure.

If you are the sole partner today but expect to open up the capital tomorrow, now is the right time to think about it: negotiating the rules before conflicts arise is much easier than doing so afterwards.

How we work at SIH ONE

We draft shareholders’ agreements coordinated with the articles of association and with the company’s tax structure, calibrated to the real distribution of power between the partners. The aim is not to produce a long document, but one that really works when it matters: in an exit, in a capital increase, in a disagreement.

Are you opening up your company’s capital or wanting to govern the relationships between partners before growing? Discover our services on capital and extraordinary transactions and set up solid agreements between the partners.