The Role of Shareholders' Agreements in Luxembourg: Why Are They Important?

Shareholders’ agreements (commonly abbreviated as SHA) are widely used in corporate structures. Their coexistence with the articles of association (commonly abbreviated as  AoA) has become standard practice for corporate structuring. But what exactly is an SHA, and why have one in addition to the AoA?

Purposes of a Shareholders' Agreement

• Confidentiality and Enhanced Governance: A SHA complements the AoA by covering certain aspects that shareholders may not wish to make public. These include corporate governance rules (particularly where different categories of shareholders exist), share transfer restrictions (such as rights of first refusal, tag-along, and drag-along rights), pricing mechanisms, preferential rights in distributions and liquidation, and exit strategies.

• Specific Arrangements Between Shareholders: Some shareholders may prefer to regulate their relationship through a separate contract, outlining agreements on voting rights (voting agreements), financing obligations, or any other bespoke arrangements they deem necessary.

General Use of an SHA

A SHA is particularly beneficial in situations where:

• Different categories of shareholders exist, such as in a financing round, where founders and investors must strike a balance between their respective interests.

• The governance framework is too complex to be fully incorporated into the AoA.

• A tailor-made approach is needed to complement the general structure provided by the AoA.

Differences Between AoA and SHA

• Binding Effect: The AoA bind all shareholders and the company, whereas a SHA applies only to the parties who have signed it.

• Amendments: The AoA can be amended by the majority stipulated therein, while any change to a SHA would require unanimous consent among its parties.

• Company’s Involvement: The company itself is not necessarily a party to the SHA, whereas it is always bound by the AoA.

Interaction Between AoA and SHA

• The SHA must not contradict the AoA or applicable laws; otherwise, its provisions would be considered invalid.

A shareholders’ agreement is a powerful tool for structuring corporate matters and ensuring alignment between shareholders. While the articles of association set the general legal framework, a SHA allows for greater flexibility, confidentiality, and customization of rights and obligations. By carefully drafting both instruments, shareholders can ensure a robust and efficient corporate structure tailored to their specific needs.