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Shareholders agreement. Important points to be considered from an investor perspective
Definition and Purpose
A shareholders’ agreement, also referred to as a stockholders’ agreement, is, as indicated in its title, an agreement concluded by and between the shareholders and, often, the company itself.
In Romania, while articles of incorporation – the basic constitutional document for all Romanian companies – is mandatory and must be registered with the Trade Registry (under Companies Law no. 31/1990), the SHA is neither expressly required by law nor mandatory for the incorporation and operation of the company and, consequently, it need not be publicly registered to be effective.
However, especially as it is flexible to fit the specific needs of shareholders – a function of the lack of specific legal provisions regulating its content – and due to its private nature, which allows shareholders to address sensitive and/or confidential internal matters, many business partners choose to define their partnership by means of a SHA.
Primarily, the purpose of the SHA is to supplement – and supersede – the articles of incorporation in order to stipulate binding rules for the shareholders to preempt any potential disputes during the operation of the company, in order to protect both the shareholders and the company. SHAs traditionally address aspects such as, but not limited to, the scope of business and business strategy, shareholders’ rights and obligations, management, ownership and transfer of shares, financing, and exit strategies.
Ideal Moment to Conclude a Shareholders Agreement
Even though a SHA may be entered into anytime, it should ideally be created either at the incorporation of the company, or, in case of investors entering a company, simultaneously with the financing and acquisition of shares in order to regulate the specific rights and obligations of the shareholders pursuant to such financing.
One should assimilate the SHA with a business prenup to clarify as many potential disagreements as possible before proceeding with the investment of all the resources required in order to build and operate the company.
Important Aspects to be Addressed from an Investor Perspective
In particular, regardless whether financing a start-up or a more mature company, investors should take care to address the following issues:
Scope of Business and Strategy. Shareholders should take the necessary time to clarify and agree upon their overall business objective and the strategy they intend to employ to reach it. If major disagreements arise between them on such subjects down the road, they will either enter a blockage or, depending on the shareholding structure, the shareholder(s) holding the majority will implement its/their strategy.
Restrictions on Shares Transfer. Such provisions are mainly transfer mechanisms meant to control who may or may not acquire company shares and are therefore a useful tool for both business partners deciding to start a company based in part on a private relationship and for an investor entering a start-up or existing company based at least in part on the know-how or other particular characteristics of the founding parties. The most common versions of this mechanism are: i) right of first refusal – priority granted to the non-transferring shareholders to purchase the shares offered for sale by any shareholder, pro-rata to their quota of shares; ii) tag-along rights – allowing non-transferring shareholders to participate in the sale of the shares with the observance of the same terms agreed upon between the assignor shareholder and the proposed assignee, pro-rata to their quota; and iii) drag-along rights – allows a majority shareholder to require the minority shareholders to participate in the sale of the company shares.
Distribution of Revenues. Shareholders may agree that payments of all costs related to the operation of the business shall be made with priority and, when appropriate, repayment of investor loan shall be made prior to dividends payment.
Mention should be made that shareholders must periodically review and asses if any changes should be implemented in the SHA in order to further serve their purposes.