What is a French shareholders’ agreement for?

The articles of association are public, enforceable against everyone and constrained by the corporate form. The agreement is the opposite: confidential, flexible, limited to its signatories. Most difficulties between shareholders, deadlock, departure of a founder, arrival of an unwanted third party, disagreement over distributions, are resolved by what the agreement did, or did not, provide.

1. Agreement and articles: who does what

The articles set the company’s legal organisation; they bind all shareholders, present and future, and can be consulted at the registry. The agreement supplements the articles between its signatories only and remains confidential. The allocation is a matter of strategy: a clause placed in the articles of a SAS benefits from their corporate effect, a clause placed in the agreement stays discreet and is amended without publicity. The two documents must be drafted together, because a contradiction between them creates litigation instead of preventing it.

Before any drafting, each clause should be assigned its place, articles or agreement, against two criteria: who must be bound, and who may know.

2. Controlling the capital: approval, pre-emption, lock-up

The first purpose of the agreement is to control who holds the capital. An approval clause makes any transfer subject to the consent of the other signatories or of a designated body. Pre-emption gives existing shareholders priority to buy shares offered for sale. A lock-up prohibits any transfer for a given period, long enough to stabilise the shareholding after a fundraising or an acquisition. These clauses are combined and calibrated: scope of the transfers covered, transfers between shareholders, contributions, gifts, notification procedure, response periods, price.

The definition of “transfer” is the most sensitive point: a narrow definition is circumvented by contribution, gift or sale of a shareholder’s holding company, and empties the mechanism. See also: how does a French share transfer approval clause work?

3. Organising exits: tag-along, drag-along, put and call options

The agreement organises liquidity. A tag-along clause lets minority shareholders sell on the same terms as the selling majority shareholder. A drag-along clause obliges minority shareholders to sell where an offer covers the whole capital, so that the sale does not fail. Put and call options, granted upon defined events, departure, removal from office, a deadline being reached, give deadlock situations a contractual outcome; a unilateral promise is secured by article 1124 of the French Civil Code, under which revocation during the option period does not prevent the formation of the promised contract.

Each exit mechanism should be tested against a concrete scenario, who sells, to whom, at what price, within what period, because an exit clause that does not precisely designate its price or timetable protects no one.

4. Governance: information, committees, reinforced majorities

The agreement supplements the corporate governance: reinforced information rights for investors, periodic reporting, a strategic or supervisory committee, a list of major decisions subject to prior consent, budget, key hires, indebtedness, asset disposals. It also allocates seats on the management bodies and provides for the fate of those rights in case of dilution or partial exit.

Reserved-matters lists should stay short and ranked: a list that is too long paralyses management and turns every board meeting into a negotiation.

5. Departure clauses: leaver, exclusion, non-compete

The agreement settles the fate of the shares of a shareholder who leaves office. Leaver clauses organise the buy-back of their shares, often on price terms that differ with the circumstances of the departure. They are completed by non-compete and non-solicitation undertakings, limited in time and territory, and by exclusion clauses, which allow the shares of a shareholder to be bought back in case of serious breach, under a procedure the agreement must describe precisely.

The price terms of these buy-backs are negotiated at signing, in calm conditions: leaving them to a future discussion schedules the dispute for the moment the relationship has already broken down.

6. Sanctions and effectiveness

The agreement is a contract: its breach exposes the breaching party to damages and, under the conditions of article 1221 of the French Civil Code, to specific performance, which may be pursued after formal notice unless performance is impossible or manifestly disproportionate. Its effectiveness is reinforced by drafting: promises enforceable in kind, quantified penalty clauses, escrow of the shares, a transfer-registration mandate entrusted to a third party, and transposition into the articles of the clauses that must bind everyone.

The question to ask of every clause is its sanction: a provision whose breach costs only damages that are hard to quantify has limited deterrent force.

7. When to update it

An agreement goes stale: fundraising, entry or exit of a shareholder, change of management, new capital allocation. Every operation on the capital should trigger its re-reading, and successive agreements must expressly settle the fate of earlier ones, to avoid contradictory texts coexisting.

The useful reflex: at every amendment of the articles or movement of shares, check that the agreement, the articles and the capitalisation table tell the same story.

Frequently asked questions

This information is general and does not constitute legal advice. Every transaction calls for its own analysis.