When Your Shareholders’ Agreement Becomes a Golden Prison

In a few days, perhaps even in a few hours, you are going to sign a shareholders’ agreement.

You may be thinking: “It’s just a formality. We’re on the same page. Everything will work out.”

Yet shareholders often sign these agreements without fully understanding the scope and consequences of the commitments they are making.

And that is where the trap can close: what was supposed to secure your future can become a serious obstacle when a conflict arises.

A shareholders’ agreement can have unexpected consequences. When relationships deteriorate, clauses designed to protect the shareholders may actually make separation extremely difficult.

You wanted security? You may find yourself locked inside a golden prison.

Claire’s story: trapped in her own partnership

Claire is a talented entrepreneur. She meets Paul, who is also a financial expert. Together, they set up an accounting firm specialising in medical professionals.

They each own 50% of the company.

Success quickly follows. They build a team of around ten skilled and reliable employees.

The business grows:

• excellent clients;
• strong profitability;
• comfortable cash reserves.

The ideal scenario.

After several successful years, Claire wants to secure the future of the business. A shareholders’ agreement is prepared, apparently covering every possible detail.

Paul signs it.

A few years later, however, Claire begins to suffer from severe fatigue. Her doctor warns her that she is at risk of burnout and advises her to slow down.

She gradually realises that she has taken on too much responsibility. She also finds it increasingly difficult to cope with Paul’s obsession with cutting costs and constantly protecting the company’s margins.

Yet she does not tell him how she really feels.

The situation deteriorates.

Claire then takes a closer look at the consequences of the shareholders’ agreement she signed.

And what she discovers is alarming:

• the agreement was concluded for 10 years, with another seven years still to run;
• leaving early triggers a 10-year non-compete clause, combined with a penalty of €25,000 for each clientconcerned;
• an absence due to illness lasting three consecutive months may, under the provisions of the agreement, result in her exclusion from the company with a 50% discount on the value of her shares.

Yet Claire had been involved in preparing the agreement herself.

She believed she had properly protected the company by including clauses she considered relatively standard.

But she had never seriously considered that one day she might:

• become ill;
• no longer be able to work with her business partner;
• want to leave the company after only a few years.

The agreement that was supposed to protect her future has become one of the biggest obstacles to her exit.

Three traps that deserve particular attention

Trap No. 1: committing for too long

A situation that occurs regularly sounds something like this:

“I signed for ten years. Three years have passed and I already can’t stand working with my business partner anymore. I still have seven years left. How do I get out?”

Predicting how a business partnership will evolve over three years is already difficult.

Over ten years, almost everything can change: family circumstances, health, professional ambitions, the company’s strategy or simply the relationship between the shareholders.

When that relationship deteriorates, an excessively rigid long-term commitment can become particularly problematic.

A more cautious approach:

Consider an initial agreement for a relatively short period, for example three years.

Six months before it expires, the shareholders can meet to review their collaboration and renegotiate provisions where necessary.

The new arrangements can then be formally recorded in writing.

A shareholders’ agreement does not necessarily have to be treated as a document frozen for an entire decade. The company evolves, and so do its shareholders.

Trap No. 2: accepting a disproportionate non-compete clause

Many entrepreneurs were already active in their profession before entering into a partnership.

When the partnership ends, they usually want to continue working in the industry they know best.

That is when they may discover the very real consequences of an excessively long non-compete clause.

They may find it impossible, or extremely difficult, to resume work in their own area of expertise.

A more cautious approach:

The duration, geographical scope and activities covered by a non-compete clause should be reasonable and appropriate to the specific circumstances.

It may also be useful, at the beginning of the partnership, to draw up a list identifying the clients brought into the company by each shareholder and have that list approved by all parties.

Several years later, when memories are less precise and relationships may have deteriorated, such a document can prevent many disputes.

Trap No. 3: the “bad leaver” clause

A so-called bad leaver clause generally provides that a shareholder leaving the company under certain circumstances considered to involve misconduct must sell their shares at less than their normal value.

The discount can sometimes be substantial.

In principle, the mechanism may appear reasonable. Its purpose can be to prevent a shareholder who has seriously breached their obligations from benefiting from the same exit conditions as someone leaving the company under normal circumstances.

However, when the criteria are too vague or the penalties disproportionate, the clause can itself become a major source of conflict.

It may even create an incentive to look for mistakes made by the other shareholder.

Situations can then arise where a shareholder is:

• placed under pressure and subsequently criticised for their reaction;
• denied access to certain information and later accused of poor management;
• confronted with an accumulation of difficult-to-prove allegations such as “lack of commitment”, “poor attitude” or “failure to cooperate”.

The mechanism designed to protect the company can then become a weapon in a dispute between shareholders.

A more cautious approach:

Bad leaver clauses should be examined particularly carefully.

The circumstances that trigger them should be clearly defined and their consequences proportionate.

In many cases, simple, predictable and balanced exit mechanisms may prevent more disputes than a heavily punitive system.

Why do shareholders sign such agreements anyway?

Because enthusiasm generally dominates at the beginning of a business partnership.

You believe in the project.

You trust your future business partner.

And that is obviously a good thing.

But this optimism can also lead people to underestimate certain risks.

Several assumptions are particularly common:

• “We’ll never fall out.”
• “The more complicated the agreement, the better protected I am.”
• “These are just standard clauses.”
• “We’ll deal with that later.”
• “If things go wrong, we’ll always find a solution.”

Yet it is precisely when the relationship deteriorates that every sentence in the shareholders’ agreement suddenly becomes important.

Conclusion: never treat a shareholders’ agreement as a simple formality

A shareholders’ agreement can protect your future.

But it can also lock you into an impossible situation for years.

Before signing, you should therefore consider not only the ideal scenario but also the difficult ones:

What happens if I become ill?

What if my business partner and I can no longer work together?

What happens if one of us wants to reduce their workload?

Can I leave the company in three years?

How will my shares be valued?

Will I still be able to work in my profession after leaving?

A business partnership evolves over time. The agreement should therefore protect the shareholders without trapping them.

Because a good shareholders’ agreement should not only determine how you are going to work together.

It should also determine how you can separate fairly and efficiently if, one day, working together is no longer possible.