Overview of the shareholders agreement – A guide for founders of stock corporations in Switzerland

The shareholders’ agreement is an essential contract for the founding shareholders of a public limited company in Switzerland. It governs their rights, duties and responsibilities and provides a framework that goes beyond the limited mandatory provisions of the Swiss Code of Obligations. This agreement is particularly valuable for small public limited companies where personal relationships between shareholders play an important role.

By clearly defining expectations and procedures, a shareholders’ agreement helps to avoid disputes and ensure alignment with the company’s goals and vision. This article provides the key to understanding the components and implications of a shareholders’ agreement, which are critical to effective governance and long-term synergies between shareholders.

What is a shareholders’ agreement?

A shareholders’ agreement is a binding contract under private law between the founding shareholders of a company in which their rights, responsibilities and obligations are defined.

According to the Swiss Code of Obligations (CO), the only mandatory obligation of the shareholders of a public limited company (AG) is to pay up the share capital for the shares issued to them (Art. 680 para. 1 CO). Shareholders cannot be obliged by the articles of association to pay more than the amount stipulated when a share is issued. A common way of overcoming this restriction is a contract under private law between the shareholders themselves (the shareholders’ agreement), which imposes various additional rights and obligations on them, to which they knowingly consent.

The shareholders’ agreement is particularly useful for smaller public limited companies where the founding team has personal and/or professional relationships with each other and are jointly the main shareholders of the company. Entering into a shareholders’ agreement is an effective way to avoid disputes and ensure that everyone is aligned with the common goals and vision of the company.

Who is bound by the shareholders’ agreement?

It is important to understand that the shareholders’ agreement is a private contract concluded exclusively between the individual shareholders. Only the shareholders themselves are bound by the agreement, while the company as a legal entity is not a party to the agreement and is therefore not bound by it. The company is only bound by its articles of association and the applicable company law.

For example, if the shareholders vote at the Annual General Meeting in a way that violates a clause that they have agreed to in the shareholders’ agreement, the vote is still valid for the company. The negatively affected parties must therefore pay damages, any agreed contractual penalties or take private legal action due to the contractual breach of their shareholders’ agreements.     

When and why do you need shareholders’ agreements?

A shareholders’ agreement is required when several shareholders jointly manage a public limited company. It is particularly important to conclude a mutually binding shareholders’ agreement between the majority shareholders of small start-ups and SMEs, as it helps to ensure the smooth operation and management of the company. The agreement should be drawn up and signed as early as possible, ideally during the company’s formation phase.

The most important reasons for the need for a shareholders’ agreement include

• Prevention of disputes: By clearly outlining the roles, rights and obligations of each shareholder, the agreement helps to avoid conflicts.
• Clarification of decision-making processes: The shareholders’ agreement sets out the procedures for important decisions to ensure transparency and efficiency. It often also contains certain voting obligations and restrictions that oblige shareholders to vote uniformly on certain issues in a previously agreed manner.
• Facilitating the smooth transfer of shares: It sets out the rules for the sale or transfer of shares, such as restrictions on disposal and priority acquisition rights. This protects the company and shareholders from unwanted or hostile takeovers.

What are the most important points in a shareholders’ agreement?

The content of a shareholders’ agreement can vary greatly, as each agreement is tailored to the personal needs of the contracting shareholders, and there are few restrictions on the items it can contain.

The shareholders’ agreement is not bound by the narrow structures of company law and there are no specific legal provisions as to which provisions the agreement may contain. This allows a great deal of flexibility and freedom in structuring the shareholders’ agreement as long as it complies with the general statutory provisions and the personal rights of Swiss private law (i.e. the Swiss Civil Code and the Swiss Code of Obligations).

However, there are some points that are usually included in shareholders’ agreements:

1. Restrictions on disposal and acquisition rights

The shareholders’ agreement often contains various clauses that regulate how shares can be sold or transferred in order to maintain control within the current shareholder group. This is often the main purpose of entering into such an agreement. Some common clauses are:

1.1 Pre-emption right

A pre-emptive right gives existing shareholders the first option to buy shares that another shareholder intends to sell. The way this usually works is that a shareholder wishing to sell or transfer their shares must first offer them for sale to the other contracting shareholders in proportion to their existing shareholding before approaching a third party to arrange the sale. This ensures that the current shareholders can retain their pro rata shareholding and control of the company if they so wish.

There are usually clauses in the agreement that specify how the sale price is determined. As a rule, it is calculated as the intrinsic value of the company’s shares on the basis of a valuation carried out by a qualified auditor. The shareholder wishing to sell the shares must notify the other shareholders of their right of first refusal and they then have a certain period of time to exercise or waive their right (e.g. 30 days after delivery of the notice).

1.2 Right of first refusal

The right of first refusal (ROFR) serves a similar purpose to the right of first refusal, with a slight difference in the way it works. If the existing shareholders do not exercise their right of first refusal, the selling shareholder can obtain offers from third parties. However, once a third party offer is received, the selling shareholder must re-offer the shares to the existing shareholders on at least the same terms as the third party offer (usually at the lower of the intrinsic value or the third party offer price). The shareholder may only sell the shares to the third-party buyer if the existing shareholders do not exercise their pre-emptive right.

The ROFR gives existing shareholders a second opportunity to acquire the shares on terms at least as favorable as those offered to a third party purchaser before a sale or transfer is completed. This two-pronged approach ensures that existing shareholders have multiple opportunities to retain their control and stake in the company. The ROFR also provides a mechanism for market validation of the share price through third party offers.

1.3 Co-sale right (tag-along-right)

A tag-along right gives the shareholder the right, in the event that other shareholders sell their shares, to also sell their shares to the same third party purchaser at the same price and on the same terms. The proposed buyer is therefore obliged to buy all the shares of those who exercise their tag-along right and should be informed of the existence of this right before committing to buy shares.

The tag-along right usually comes into effect when a certain proportion of shares is offered for sale or transfer, e.g. over 50% (which would result in a change of control of the company).

The joint selling clause has many functions. One purpose is to protect minority shareholders by allowing them to sell their shares together with a majority shareholder who is selling his stake, thereby ensuring that they can leave the company on the same terms as the majority shareholder.

Another function is to protect the founding shareholders from losing control of the company while they are still stuck as owners of shares (i.e. they have the option to give up their position if they learn that the company is getting a new majority shareholder).

1.4 Co-sale obligation (drag-along-right)

Drag-along-right enables the majority shareholders to force the minority shareholders to participate in the sale of the company. This ensures that a potential buyer can acquire 100% of the company if it so wishes, simplifying the sale process. The drag-along right also usually becomes enforceable if a certain minimum percentage of shares is sold to a potential buyer (e.g. at least 70% of the shares).

1.5 Conditional purchase rights

Various conditional purchase rights allow existing shareholders to acquire shares under certain conditions, e.g. in the event of a shareholder’s bankruptcy, death or breach of the agreement. This helps to ensure stability and continuity in the company’s ownership structure by giving existing founders the right of first refusal in numerous scenarios where their ownership could otherwise be diluted or jeopardized. The purchase right generally applies in proportion to their existing shareholdings.

2. Obligations and restrictions on voting

The shareholders’ agreement can contain clauses that contractually oblige shareholders to vote on certain issues at the Annual General Meeting in a predetermined manner. This ensures a common direction in decision-making and prevents a tie vote, especially if there are only a few shareholders. Setting voting restrictions and obligations from the outset can also help to avoid disputes later on.

Voting obligations can include everything from decisions on the distribution of profits to the election of the Board of Directors. Everything is permissible as long as it is not illegal and cannot be interpreted as an attempt to “buy votes”.

3. Duty of loyalty and non-competition clauses

The shareholders’ agreement often contains clauses that require shareholders to act in the best interests of the company and avoid activities that could harm the company or compete with its business. This may include the following:

• Refraining from soliciting employees or customers during the shareholder’s participation in the company and for a limited period thereafter.
• not to conduct business in the company’s geographic markets that competes with the company’s business or pursues the same purpose as the company.
• Non-disclosure of valuable or sensitive company information.

The inclusion of competition rules in the shareholders’ agreement ensures that all shareholders work towards the same goals and do not undermine the company or each other. However, the obligations should also not be so unreasonably restrictive that they completely limit the shareholder’s freedom, especially if they go beyond their shareholding in the company.

4. Clauses relating to the Board of Directors and company management

The agreement often contains provisions on the composition, election and dismissal of the Board of Directors as well as its voting rights and duties. It can also outline the tasks and responsibilities of the company management in order to ensure a clear management structure.

5. Profit distribution and corporate financing

The shareholders’ agreement usually sets out how profits are distributed among the shareholders and how the company is financed. This includes details on dividends, reinvestment of profits and procedures for raising additional capital.

For example, the agreement can stipulate that a maximum of 30% of the company’s profits are to be distributed as dividends, while the remainder is to be reinvested in the company.  It can also oblige the shareholders to provide the company with funds in the form of loans (up to a certain maximum amount) if required.

6. Duration and termination clauses

These clauses specify the duration of the shareholders’ agreement and the conditions under which it can be terminated. This ensures that all shareholders are informed of the term of the agreement and the procedures for its termination. It is important that the term of the shareholders’ agreement is long enough to ensure adequate protection for the parties.

Swiss legislation does not stipulate an upper limit for the duration of shareholders’ agreements. Nevertheless, such agreements must not run indefinitely or for too long a period, as this binds the parties too tightly and interferes with their personal and economic freedom. In practice, it makes sense to adapt the duration of the shareholders’ agreement to the lifespan of the company, but there is still some legal ambiguity here.

7. Sanctions for breaches of the shareholders’ agreement and other violations

To ensure compliance with the agreement and deter misconduct, the agreement may set out specific sanctions for shareholders who breach the agreement. These may include fines, the forced sale of shares or other legal remedies.

As already mentioned, shareholders’ agreements are only binding for the signatories and have no effect on the company itself. If a shareholder does not vote in accordance with the agreement at a general meeting, their vote remains valid despite a breach of the agreement. The inclusion of specific sanctions for non-compliance with the agreement is therefore an effective means of mitigating this risk and compensating the parties concerned.

8. Additional rights and obligations

The shareholders’ agreement may contain further rights and obligations that are deemed necessary by the shareholders, e.g. confidentiality agreements, the procedure for admitting new shareholders or procedures for settling disputes.