Frequently Asked Questions
Why sign the Shareholders’ Agreement when the company already has the Articles of Association?
The articles of association of a private limited company is a public document which has to include all the necessary information required by law. The Shareholders’ Agreement is a confidential document which is binding only to the parties who have entered the contract. The Shareholders’ Agreement allows the shareholders to specifically regulate the relations between themselves. Also the Shareholders’ Agreement does not have to be entered into by all the shareholders.
What happens if the Shareholders’ Agrement and the Articles of Association contradict each other?
The Shareholders’ Agreement is binding only to the parties of the contract and the articles of association apply with respect to third persons. If the two documents contradict each other, then the articles of association apply with respect to third persons, but the Shareholders’ Agreement applies to the shareholders. In order to apply the Shareholders’ Agreement with respect to third persons it it recommended to coordinate the articles of association with the Shareholders’ Agreement.
How many members can the management board have?
According to the Commercial Code the management board can have one member or several members. The exact amount or the range of members of the management board can be established in the Shareholders’ Agreement. There is no maximum number of members of the management board prescribed by law. In most cases it is recommended to appoint an odd number of members to the management board to ensure its quorum.
For which term is the member of the management board elected?
A member of the management board shall be elected for an unspecified term unless the articles of association prescribe a term. This means that the term for which the member of the management board is elected can be established with the Shareholders’ Agreement when it’s also established in the articles of association.
Can any member of the management board represent a private limited company?
A private limited company can be represented by any member of the management board individually when making transactions. However the articles of association may prescribe otherwise. It can also be prescribed that that all the members of the management board have the right to represent the company jointly. It may also be prescribed that two out of the three members of the management board have the right to represent the company only jointly, but the third member has the right of representation individually. It must be noted that if every member of the management board does not have the right of representation individually, then the joint representation shall apply with regard to third persons only if it is entered in the commercial register.
What is vesting?
Vesting means that a shareholder does not receive his share in full, but earns it part-by-part by working for the private limited company. The shareholder earns his whole share after the end of the defined (vesting)term. For example, if the term is 4 years and the shareholder is entitled to 50% of the shares after the term, then he will be awarded 25% of his share (12,5% of the total share capital) after one year. This means that if the shareholder leaves the company before the end of the (vesting)term, then he is only entitled to his earned share of the share capital.
A cliff is a period in which the shareholder must remain working for the company, otherwise if he leaves, he loses all the earned shares up to date. The aim of the cliff-period is to motivate shareholders and prevent situations where the private limited company has many small shareholders which can make the management harder. Usually the lenght of the cliff period is 1 year.
What is a tag along?
A tag along is used in case a shareholder who holds a certain amount of shares (usually at least majority shareholding) decides to sell his shares to a third party, then the other shareholders have a right (but no obligation) to demand a transfer of their shares to a third party on the same conditions.
A tag along usually protects minority shareholders by giving them an oppurtunity to exit the company when the shareholders have changed and get a better price for their shares than selling them individually. The difference between a tag along and a drag along is that there is no obligation for a shareholder to transfer his/her shares in case of a tag along.
What is a drag along?
A drag along means that in case a shareholder who holds a certain amount of shares (usually majority shareholding) sells his shares and the acquirer stipulates that he also wishes to buy all the other shares, then the other shareholders have an obligation to buy the transferable share themselves or sell their share on the exact same conditions.