Mergers and acquisitions that result in the seller retaining a stake in a company often use a Shareholders’ Agreement (SHA) to regulate the relationship between shareholders following the deal.
Below, we explain how parties on both sides can protect their interests.
How SHAs work in M&A transactions
The SHA sets out the framework governing the relationship between shareholders and how the company will be operated, covering matters such as:
- how major business decisions are made
- the rights and obligations of shareholders
- how directors are appointed
- restrictions on share transfers
- mechanisms for shareholders to exit the company in the future
If the acquisition is completed in stages, a SHA also serves as an interim governance document that applies while the transaction is still being completed.
For SME owners, this agreement ensures expectations between the parties are clearly documented once the ownership structure of the company changes.
Shareholder protection mechanisms
Below we share several mechanisms that help protect the interests of shareholders during and after an M&A transaction.
Interim governance during staged transactions
Some acquisitions are structured to complete progressively over a period of time. During this period, both the buyer and seller may remain shareholders in the company.
A SHA can set out governance rules that apply while the transaction is being completed, including how decisions are made and how the company is managed during the interim period.
Clear roles and responsibilities
If the seller continues to be involved in running the business (i.e., by remaining a director or shareholder) while the buyer appoints its own representatives to the board, a SHA can clarify the roles of each party, including management responsibilities and decision-making authority, ensuring operational expectations are aligned.
Reserved matters
Reserved matters require shareholder approval before certain major decisions can be carried out, such as decisions relating to issuing new shares, financial borrowings, appointment or removal of directors, etc.
Minority shareholder protections
The seller, often a founder, may retain a minority shareholding after the transaction. A SHA may therefore include provisions ensuring minority shareholders continue to have certain rights, such as access to company information or approval rights over specific decisions.
Share transfer controls
Share transfer restrictions are often included to ensure alignment with the arrangements in the Share Sale Agreement and regulate how shares may be transferred during the transition phase or after the transaction.
Exit provisions
Depending on the arrangement, a SHA may include provisions governing how shareholders exit the company in the future. Common mechanisms include tag-along and drag-along rights, which provide a clear framework for exiting the company if a future sale takes place.
Let ELP draft your M&A Shareholders’ Agreement
The right corporate lawyer helps ensure your commercial intentions are properly captured and governed in the agreement. If you are selling a business, acquiring a company, or entering into a new shareholders arrangement, contact us for a free initial consultation.
