Shareholder's agreement, part 2.
This article is a continuation of the previous part of our series dedicated to the shareholder agreement, which as we explained last time, is an abbreviation for shareholder's agreement.
We have already discussed what SHA is and what we can use it for, but we have not yet discussed what it should look like and what such SHA should contain. So we will look at its key aspects today.
Key aspects of the shareholder agreement
An effective SHA typically modifies the following areas. However, we remind you again that although we are talking about a joint-stock company, shareholders and shares, it is just as well possible to modify e.g. and ratios and shares in the conditions of a limited liability company.
1. Ownership and Transfer of Shares
Classes of shares and rights associated with them: defines the different classes of shares and the rights associated with each class.
Basic shares: they are usually associated with voting rights and the right to a dividend.
Special types of shares: they often have preferential rights to dividends and assets on liquidation, but may lack voting rights, they may also contain so-called broadcasting rights (see below).
Restrictions on Transferability: sets out the conditions and restrictions on the transfer of shares, including the pre-emptive right to them and the so-called blocking period.
Pre-emption: ensures that existing shareholders can retain their proportional share in future share issues (so it aims, among other things, at the so-called dilution of shares).
Periods of restriction of access to shares: determines the period during which shareholders are restricted from selling their shares.
Some other mechanisms used include:
- Call options and put options, or
- Drag along and tag along rights,
however, due to the preservation of the brief scope of our articles, we cannot focus on them in more detail. However, we will be happy to help you set them up if you are interested in these options.
2. Administration and management
Composition of the company bodies: regulates the rules regarding the appointment, removal and roles of members of elected bodies.
Organization of elected bodies: determines in particular the number of their members and their term of office.
The so-called broadcasting rights: the right to appoint individual members of elected bodies is based on the SHA of specific shareholders/partners, i.e. a specific shareholder may have the right to select a certain number of members of the board of directors based on the agreement in the SHA, while another shareholder may, on the contrary, have the right to appoint a certain number of members of the supervisory board.
Voting rights: the allocation of voting rights and required decision-making majorities for different types of decisions. With regard to the setting of majorities for decision-making we recommend thinking about the so-called blocking minority, to avoid blackmail and blocking of the company.
Majority Voting: ordinary decisions may require a simple majority.
Qualified majority voting: critical decisions may require a higher threshold, such as 75%.
Decision making: governs the processes for making key business decisions, including reserved matters that require shareholder approval.
3. Dividend policy
Distribution of dividends: it addresses the principles for distributing dividends, including the deadlines for their payment and potentially the definition of the sources of the share of profit to be distributed. In theory, the distribution ratio between individual shareholders/partners can also be adjusted (however, this needs to be approached very carefully, due to the principle of equal access to shareholders).
Dividend policy: establishes the dividend policy that is applied when distributing dividends, i.e. whether dividends are to be paid regularly or reinvested in the company.
4. Dispute Resolution
Dispute Resolution Mechanisms: establishes procedures for resolving disputes between shareholders, including mediation, arbitration and court proceedings.
Mediation: mediating negotiations between shareholders and partners; an informal process in which an independent mediator helps the parties reach a settlement.
Arbitration: a binding process in which a neutral third party makes a decision after hearing both sides.
Solving the so-called deadlock: governs the resolution of deadlocks, which may include buy-sell agreements or third-party arbitration. It is usually appropriate to define the deadlock situation correctly.
Purchase and Sale Agreements: mechanisms where one party can buy the other party's shares at a predetermined price if a stalemate occurs.
Third Party Arbitration: a neutral third party is invited to make a binding decision.
5. Confidentiality and Non-Competition
Confidentiality Clauses: definition of provisions that prevent disclosure of sensitive information to shareholders.
Non-competition clauses: restrictions on shareholders to engage in competitive business during and after their tenure with the company.
Non-compete period: the period during which shareholders are restricted from doing business in similar fields after leaving the company.
6. Modification and Termination
Procedures for changes and additions: the conditions under which the SHA may be changed; usually require supermajority or unanimous consent.
Change process: in case the SHA is in conflict with the law, the SHA can be changed – so it indicates the steps necessary to propose and approve changes to the agreement.
Terms of Termination: the circumstances under which the SHA can be terminated, such as dissolution of the company or mutual agreement of the shareholders.
Treatment of the so-called. good leaver/bad leaver situations: it is appropriate to define the various termination situations that may occur and then categorize them.
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Well done The SHA, i.e. the shareholders' agreement or the partners' agreement, is the cornerstone of successful acquisition transactions, as it provides a framework that, on the one hand, protects the interests of all stakeholders and, on the other hand, subsequently facilitates the smooth management and administration of the company. By clearly delineating rights, obligations, resolving disputes and share transfers, SHA helps ensure long-term stability and prosperity of society.
We have shown that with its help, you can, for example, discreetly prevent the dilution of shares and the loss of control over your company.In the next article, we will deal with strategies for successful integration of the acquired company into the existing structure with a focus on laying truly functional and safe foundations. So we will look at the adjustment of the founding legal proceedings, the setting of internal regulations, and we will also discuss how to make changes in the company's bodies. From the knowledge gained in our practice, we know that the integration of the acquired company is often a stumbling block. Either because of disputes between partners (which, among other things, you can prevent with the help of SHA) or because of the lack of understanding of the mechanisms used by the companies in all their consequences (typically wrong setting of decision-making majorities).
Do you need advice or representation at purchase of the company? Do you have any questions about our series or the shareholder agreement? Contact us! We have many years of experience in buying companies!
JUDr. Ing. Jan Vych, attorney and partner
