Why do you need a shareholders’ agreement?

Mergers and acquisitions (M&A) transactions involve intricate negotiations and contractual arrangements that go beyond the exchange of company ownership. Shareholders’ agreements play a pivotal role in defining the rights, obligations, and protections of shareholders in the context of these deals. These agreements are critical for ensuring clarity and alignment among stakeholders, establishing the rules of engagement, and safeguarding their respective interests throughout M&A processes.

In this article, we delve into the key aspects of shareholders’ agreements with a specific focus on their implications within the realm of M&A. We explore the fundamental clauses that are typically present in shareholders’ agreements and examine their significance when applied to M&A transactions.

Key learning points

  • Shareholders’ agreements govern interactions, management, and share ownership.
  • Share capital section defines rights associated with different share classes.
  • Preemptive rights protect existing shareholders’ ownership percentage.
  • Tag-along rights protect minority shareholders in M&A deals.
  • Earnouts and contingent consideration provide additional payments based on performance.
  • Anti-dilution provisions protect existing shareholders’ ownership in new share issuances.
  • Change of control provisions outline rights and protections in mergers and acquisitions.
  • The absence of a shareholders’ agreement can lead to disputes and inadequate protection.
  • Shareholders’ agreements are private contract, while articles of association are publicly filed documents.
  • Understanding shareholders’ agreements is crucial for assessing M&A transactions.

What is a shareholders’ agreement?

A shareholders’ agreement is a contract that is established among shareholders within a company. Its purpose is to govern the interactions between the shareholders, oversee the management of the company, define share ownership, and ensure the protection of the shareholders’ interests. Additionally, these agreements dictate the operational framework for running the company effectively.The shareholders‘ agreement is separated into various sections and provisions.

The share capital section of a shareholders’ agreement contains the structure and rights associated with different classes of shares. Common shares retain their typical characteristics, granting holders the right to vote on important matters such as electing the board of directors. Preferred shares, on the other hand, assume an elevated position in terms of dividends and assets during liquidation. The agreement may outline different classes of preferred shares with varying rights. Non-voting shares may be issued to certain stakeholders, allowing them to participate in the company’s financial success without exerting influence on its strategic direction. Convertible shares and redeemable shares could also be present, offering flexibility in capital management. Alternative share classes may exist within the share capital structure of a company involved in an M&A deal, which can introduce further complexity and considerations for analysts.

Existing shareholders strive to protect their ownership percentage ahead of M&A transactions. Preemptive rights, also known as rights of first offer (ROFO), become the shield that safeguards shareholders’ interests, granting existing shareholders the opportunity to acquire additional shares before external parties, ensuring they maintain control and preserve their ownership stakes in the face of new equity financing or share issuances.

When majority shareholders decide to sell their shares in an M&A deal, tag-along rights protect minority shareholders by allowing them to “tag along” and sell their shares on the same terms and conditions as the majority shareholders, ensuring fair treatment. On the other hand, drag-along rights may enable majority shareholders to compel minority shareholders to sell their shares to facilitate the sale of the entire company to a third party.

In certain M&A transactions, the purchase price may incorporate earnouts or contingent consideration provisions. Earnouts involve additional payments made to the selling shareholders based on the post-acquisition performance of the acquired company. These provisions are commonly used when there is uncertainty surrounding the future financial performance of the target company. Earnouts serve as both a risk-sharing mechanism and an incentive for the selling shareholders to actively contribute to the success of the acquired company in the aftermath of the transaction. By tying their financial rewards to the company’s performance, selling shareholders are motivated to drive growth and maximize value during the post-acquisition period. Contingent consideration provisions stipulate that if the acquired company achieves a predetermined milestone, such as a specified turnover threshold, within a defined time frame following the acquisition, the acquiring company will make an additional payment to the selling shareholders.

Anti-dilution provisions are commonly negotiated in shareholders’ agreements, especially in the context of equity financing rounds or when issuing new shares. These provisions protect existing shareholders’ ownership percentage by granting them the right to maintain their proportional ownership in the event of new share issuances at a lower price. For example, if an investor purchases new shares at a price significantly lower than the previous valuation, the anti-dilution provisions may enable existing shareholders to receive additional shares at a reduced price. This helps them preserve their ownership percentage and mitigate the impact of dilution.

Shareholders’ agreements may include change of control provisions, such as in the event of a merger or acquisition. These provisions can outline specific rights or protections for shareholders in such scenarios, including the ability to trigger certain events or receive special considerations. One such provision could grant minority shareholders the right to request an independent valuation of their shares before the acquisition takes place. This ensures that they receive fair compensation for their ownership stake, protecting them from potential undervaluation or unjust treatment.

The shareholder agreement checklist in the free download section details each element required for a shareholders agreement in a useful checklist.

What happens if there is no shareholders’ agreement?

In the absence of a shareholder agreement, the relationships and rights among shareholders in a company may be governed solely by default legal provisions and the company’s articles of association. Without a shareholder agreement in place, shareholders may find themselves in situations where their individual rights and interests are not adequately protected or addressed. Disputes and disagreements among shareholders can become more challenging to resolve, leading to costly legal processes to settle such disputes. A lack of a comprehensive shareholders’ agreement and ongoing shareholder disputes can introduce additional complications in the due diligence process of an M&A transaction, raising concerns for potential acquirers.

Shareholders agreement vs articles of association

While both the shareholders’ agreement and articles of association serve to govern the company’s operations and protect the interests of the shareholders, they differ in certain aspects. A shareholders’ agreement is a private contract entered into among the shareholders themselves, covering covers a broad range of issues. On the other hand, articles of association are publicly filed documents that outline the company’s internal rules and regulations. They address matters like the appointment and powers of directors, shareholder voting rights, and dividend distribution. While the articles of association provide a formal framework for the company’s structure and governance, the shareholders’ agreement offers greater flexibility and confidentiality, making it more suitable for addressing specific shareholder concerns and arrangements.


For M&A analysts, a comprehensive understanding of shareholders’ agreements is indispensable. These agreements serve as windows into the ownership structure, governance dynamics, transfer of shares, and dispute resolution mechanisms within target companies. By delving into the intricacies of shareholders’ agreements, analysts can accurately assess potential risks, opportunities, and outcomes of M&A transactions.

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