Shareholder's agreement, part 1.

In previous articles, we focused on strategic approaches, financing options or the due diligence process. Now we will focus on a key document in the scope of acquisitions and M&A (ie the abbreviation of the English combination Mergers and Acquisitions) practice in general, namely on so. shareholder's agreement, or shareholder (or company) agreement. You may know it better by its more commonly used acronym "SHA", which is often used for a shareholder agreement.

This article will provide you with overview about:

• what exactly is a shareholder agreement
• about its key aspects, or rather about its basic building blocks, if you will, and
• about its importance in the context of the acquisition and subsequent management of the company.

However, since this topic is too extensive for a single article, we have divided it into two parts. Therefore, we will not look at the basic building blocks of SHA until next week.

1. What is a shareholder agreement?

Shareholders' agreement (hereinafter only in its English abbreviation "SHA“), as the name suggests, is legally binding agreement between shareholders of society that defines their mutual rights and obligations. It regulates relations between shareholders, the basics of company management and the ownership and transfer of shares. SHA has of fundamental importance, especially within M&A practice, as it helps to establish clear rules and protections for all parties involved. At the outset, it is important to set the record straight that, despite its name, this is not an agreement necessarily concluded only between the shareholders of a joint-stock company, but it can also be concluded by, for example, partners of a limited liability company.

2. Why is the shareholder agreement so important?

In relation to acquisitions, the SHA performs several essential functions:

• It protects the interests of shareholders/partners: ensures the protection of the interests of all participating business partners, including those with a minority stake.
• It defines the management structure: clarifies management and decision-making processes in the company.
• Facilitates smooth transactions: it provides mechanisms for resolving disputes and includes, among other things, rules for the transfer of shares, thereby facilitating a smoother flow of transactions.
• It ensures the continuity of the company: contains provisions that help ensure the continuity of the company in the event of disputes between shareholders/partners, changes in ownership or other significant events.
• It can prevent the so-called dilution of shares or loss of control: it is typically possible to set restrictions on the transfer of shares and pre-emptive rights to them or obligations directly for individual shareholders/partners in relation to their shares.

3. Cases of using the shareholders' (partners') agreement within the acquisition

In M&A, SHAs are used in a variety of scenarios, primarily those listed below. The individual ways of use outlined can be an inspiration for your transaction.

3.1 Joint ventures

When two or more business partners establish a so-called a joint venture, the SHA is key to defining the rights and obligations of each party and ensuring clear rules for the management and governance of the company.

3.2 Private equity investments

In the case of private capital transactions, i.e private equity, investors, the SHA is essential for protecting investors' interests, establishing governance structures and defining exit strategies.

3.3 Investments in start-ups

In the case of start-ups (i.e. start-up companies with high potential) that are looking for external investors, the so-called venture capital, the SHA may outline the terms of the investment, investor rights and plan for future growth and potential exit strategies for the company.

3.4 Family businesses

In family businesses, SHA helps manage relationships between family members, outline succession plans and ensure business continuity.

However the question of family succession and intergenerational transfer of property in general is a chapter in itself and is a very hot topic especially nowadays. We recommend not resting on our laurels, so to speak, because whether we admit it or not, this is a topic that should be addressed by all entrepreneurs who care about the fate of their life's work.

záver

We have not exhausted this topic yet, but with this introductory part we have already highlighted the importance of SHA, its correct setting and we have presented different ways of using it. Whether SHA is something new for you or you have already encountered it in practice or at least by hearsay, so we firmly believe that SHA can become routine in your acquisition activity. We will be happy to help you with it.

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