What you often find out when drawing up a shareholder agreement is that not every shareholder has thought extensively about all the relevant issues, often because the shareholders are active in the business of the company and put their time and energy into building the company. It is therefore not surprising that a shareholder has never thought about the exact consequences of a shareholder's departure, what happens if a shareholder falls ill (for a prolonged period of time) and is no longer able to perform his duties for the company, or what to do if one of the shareholders receives an offer from a third party to take over the shares in question. For all of the aforementioned matters, we will (if desired) include specific arrangements in the shareholders' agreement so that something has been arranged regarding the most common situations with which you may be confronted.
In addition to drawing up a shareholder agreement between all founders of a company, a shareholder agreement is also discussed if one or more (large) investors invest in your company. In such a case, an investor intends to acquire a certain amount of control. We usually assist the company and advise on which agreements are in line with the market and what impact certain arrangements can have. Below, we will discuss a number of subjects in more detail, so that you can get a better understanding of what can be included in a shareholder agreement and in which variations such provisions occur. It is worth remembering that each shareholder agreement ultimately is a tailor-made document that we can adapt to the wishes of the shareholders (and investor(s)) in order to best serve everyone's interests and to facilitate the growth of the company as much as possible.
Lock Up
A provision that is often included in a shareholder agreement is a so-called 'lock up' period. During this period, it is agreed that none of the shareholders (or specifically none of the founders) may transfer his or her shares to a third party. This lock up period is often introduced to ensure that all shareholders (or at least the founders) commit themselves for a certain period of time to make the company a success and not just 'leave the ship'.
Reverse vesting
Another (or additional) way to ensure that the founders are fully committed to the success of the company for a certain period of time is the so-called 'reverse fortress'. This is a smart way to use the freedom of contract offered by Dutch law to avoid high notarial costs. In many situations, it is customary to want to reward a shareholder on the basis of the expiry of a certain period of time with a quantity of shares and the associated rights. Because shares in the Netherlands have to be transferred or issued via the civil-law notary, it would be costly to have to go to the civil-law notary for each 'tranche' of shares. This can be solved via the reverse vesting. In that case, all shares would be issued in full or transferred to the shareholder(s), whereby it would be included that only a portion of the shares would be considered 'vested', as a result of which the shareholder in question would not immediately have all rights with respect to his or her shares. On the basis of the passage of time (such as the vesting of a percentage per quarter) or the achievement of milestones (such as having produced an initial prototype of a product or attracting an investment), more and more shares are then considered to be vested until a shareholder ultimately has full rights over all shares. Specific rules are then included in the 'leaver provisions' (read more about this 'leaver' arrangement below) in the event that a shareholder transfers his or her shares (whether forced or not) before all shares are fully vested under this provision.
Leaver arrangements
The so-called leaver arrangements are one of the most important and fundamental provisions to be included in a shareholder agreement. These arrangements come in many different shapes and sizes and can be very concise or very extensive based on the wishes of the shareholders and/or potential investors. A distinction is often made between a 'bad leaver', a 'good leaver' and in some situations an 'early leaver' or a 'neutral' leaver. The terms speak for themselves reasonably well when it comes to the severity of the consequences of leaving the company, and mainly concern the compensation that a shareholder receives for his or her shares if there is a certain type of 'leaver'. For example, it is common practice to require a shareholder who qualifies as a 'bad leaver' to offer his or her shares to the other shareholders (or the company) for a price equal to the nominal value of the shares. The nominal value will in most cases be very low and not representative of the actual value of the shares. In the case of a 'bad leaver', there is often a situation in which it is not logical to reward the shareholder in question with a high value, such as in the event of the shareholder's bankruptcy or if a shareholder infringes, for example, the non-competition provision or the confidentiality clause in the shareholders' agreement. In the case of a 'good leaver', there is often a situation in which it is more logical for the shareholder in question to transfer his or her shares, but this is not necessarily done for a low remuneration, for example as a result of the shareholder becoming unfit for work for a long period of time. A common method in such cases is to transfer the shares to the other shareholders or to the company against payment of a fair market value, determined by mutual agreement (or by means of a register valuer). If necessary, in order to protect the company's liquid position, a payment arrangement may be included in the shareholders' agreement for cases where shareholders transfer their shares on the basis of a certain fixed amount or fair market value.
Non competition
The shareholder agreement often includes a non-competition clause to prevent shareholders from competing with the company's business during the time they hold shares (or within a period of time after they cease to hold shares). This provision can be set up on the basis of mutual agreements and may vary in the extent to which it restricts shareholders in their competitive activities, depending on the circumstances of the case and the specific wishes of the other shareholders.
Anti-dilution
As soon as an investor comes on board, they sometimes require not to be 'diluted' as soon as new capital is raised and subsequently new shares are issued, as a result of which the existing investor would normally hold a smaller percentage of the share capital than he did at the time the investment was made. To counteract this phenomenon, we can include a provision with a formula that ensures the investor always holds a certain agreed percentage of shares.
Dead lock
In the event of an equal distribution of the share percentage of two shareholders (fifty-fifty), the so-called 'dead lock' situation is lurking. Various mechanisms are possible to prevent the company from no longer being able to function as a result of a dead lock situation. In consultation with the shareholders involved, we can implement an appropriate rule that is acceptable to all parties and primarily ensures that the company is not hit too hard by the dead lock situation. Feel free to contact us!