Contribution #2 — The Shareholders Agreement : an essential document for better and for worse
For entrepreneurs, guided by operational issues, the terms of the Shareholders Agreement and the “legal formalism” that accompany them are not easy to grasp.
“These questions of an exasperating legal formalism occupied a growing part of my working time, I had to keep myself in the” nails “, of which I have never really known, there is certainly no a sector of human activity that is as boring as the law.”
Michel Houellebecq, Serotonin, p.147
Too many entrepreneurs wishing to join forces underestimate the importance of the pact and its provisions, which they mistakenly consider as “legal issues” and delegate the formalization and negotiation of this one to legal professionals.
What is a Shareholders Agreement ?
The Shareholders Agreement is a contract, a “contract of marriage and divorce”, passed between all the partners or only a part, and which has for vocation to remain secret. In the case of a contract, its clauses must be in conformity with the statutes and the law.
In addition to being an important contractual document, it is a moral contract that lays the foundation for the relationship, and the challenge of negotiations is to ensure everyone’s willingness to agree and find a balance.
Therefore, it requires that the legal professional who will advise the partner, enter into the intimacy of the latter, he understands the objectives of the association, the means to be implemented, the expected results and when will they be expected? On the basis of these answers, the legal professional will draw on his “color chart of clauses” and propose to his client a customized pact.
The clauses and mechanisms developed by legal professionals allow the design of contractual documents of great sophistication, often in English with a vocabulary of their own where the “PUT option” alongside the “CALL option”, the “TAG ALONG (rights)” (joint exit clause), the “DRAG ALONG (rights)”, the “DEAD LOCK” case and other terms that make the legal professionals who negotiate such agreements are often rightly considered the pinnacle of the profession.
Is there a Shareholders Agreement ?
There is no obligation, but do not forget that the statutes and the law are accessible to all, only the partners pact is intended to remain secret. From the moment you include specific terms and conditions (sales and purchase options, valuation, etc.), it is preferable to keep them confidential.
And then, if you still have a doubt, ask yourself another question: do you want the details of your “marriage contract” to be known to all?
Can a Shareholders Agreement be SIMPLE, CLEAR and BALANCE?
The answer to this question is not easy, because the pact must meet several requirements, sometimes contradictory. He engages the parties for the better and for the worse.
SIMPLICITY — Associates must understand and assume the commitments they will make.
Associates are made to make multiple commitments; taking them does not necessarily mean understanding and assuming them.
Manage the joint life of the association. The pact specifies all the rules of good functioning, in any case those which are not in the statutes. The goal is to consider and anticipate any blocking situations or decisions to be made, and to plan the best way to solve them.
Predict how associates will “divorce”. You must be aware that one day you will be able to separate, and that everyone has an interest in this happening in the best conditions.
Help manage the breakup, and have it in mind throughout the life together. It is a kind of “divorce contract”, which will calm the heat in case of disagreement.
To be able to be evolutionary. A pact of associates is signed for a given time. Any new capital entry (like any exit) may involve adjustments. Any significant change in the life of the company can call for change of pact.
Do not replace common sense. A pact is written for the better and for the worse, although it is always difficult to keep calm during a conflict, having a document written in peaceful time helps enormously and can allow everyone to regain his wits and his lucidity.
Formalize an action plan before drafting the pact. Ensure that the visions of future associates are aligned, by answering 4 key questions:
- What are your goals? WHAT
- What means are you going to implement? HOW
- What results do you expect? HOW MUCH
- What are your deadlines? WHEN
Click on the link below to access the document prepared by APEC, simple and relevant in 4 columns.
We recommend that each partner prepares their answers in writing for a presentation to the other partner (s), in the presence of a “third party observer”, TOLTEC for example.
This “third observer” will not be able to take a stand for this or that part, he will be present to ensure the construction of a SIMPLE, CLEAR and BALANCED relationship.
He will answer the questions, give some answers, keys and will be able to emit at the end of the discussions a report with non-binding recommendations for the parties, but which will reflect his perception of the expression of needs.
This report will then develop a common document that can be described as “action plan”, “basis of the agreement”, “road map”, “common principles”, which will be annexed to the pact of associates.
CLARETE: Avoid intelligence contests
Mergers & Acquisitions practitioners (investment banks, consulting firms, financial experts and legal professionals) carry out numerous transactions every year, they dexterously handle the different mechanisms. They offer their customers mechanisms as clever as each other with sophisticated protection devices that can combine different clauses and produce complex mechanisms, which to read a few years later will be difficult to grasp.
“What is well conceived is clearly stated, and the words to say it arrive easily.”
Caution must be exercised and above all it is essential to understand the nature of the commitment and to be accompanied by experienced practitioners, who will have a listening capacity and will slow down their creative enthusiasm, because even if:
“Creativity is intelligence that plays”
Do not forget that :
“The best is the mortal enemy of good”
BALANCE — Pacts often unbalanced
We can only advise against the signing of a shareholder agreement not understood, because this misunderstanding will create an imbalance and frustration, which will weaken confidence and may lead to divorce.
Among the reasons for such imbalances, the first is to be found in the insufficient involvement of an entrepreneur in the elaboration of the agreement, because he does not have the technical knowledge or that he is taking the time, and / or because he has delegated to a legal professional the formalization and negotiation of the latter.
You have to understand that certain partners to widen their tour de table, ensure the durability of their company, will tell you not to have the choice and be taken by the time … Indeed, they will not have taken the time … the time to understand the combined effects of certain clauses of the pact.
Forced to accept the unacceptable, and this because it gave them the means for their development, valued their company and their initial participation, which may appear as a good operation in the short term, in the longer term may have a bitter taste …
To read this fascinating article in capital, on Jean-Charles Naouri, president of Casino, which retraces its costs of brilliance, especially against Carrefour.
Naouri, ou l'art de se faire des ennemis
Le P-DG de Casino est parti en guerre contre les Galeries Lafayette, pour prendre le contrôle de Monoprix. Encore un…
Too many partners underestimate the importance of the pact and its provisions that they mistakenly consider as “legal issues” and delegate the formalization and negotiation of these to legal professionals, who will provide products intellectually. and legally qualitative, but they will not seek to grasp the intricacies of the mechanisms of the options of cross buying and selling.
- Formalize your action plan or roadmap: never stay on unspoken issues with your partner / associates;
- Get yourself accompanied for the formalization of the pact, by a legal professional, who will know how to listen to you and avoid competing intelligence;
- Do not neglect the daily relationship with the partner;
- SIMPLE, CLEAR and BALANCE.
Thanks to :
Caroline FERNANDEZ — Consultant accompanying the entrepreneurs of the idea to the prototype on the project aspect
Nicolas FRANCOIS — APEC Innovation Manager