The Shareholders’ Agreement: When the Seller Stays in the Deal

Not every M&A transaction ends with the seller walking away from the business entirely.

In many acquisitions, particularly in private equity, founder-led businesses and minority investments, the seller retains part of the equity after closing. Management may roll over shares into the acquisition vehicle, a founder may remain as a significant minority shareholder, or the buyer may deliberately acquire less than 100% of the target.

At that point, the transaction changes character.

The SPA governs the acquisition itself. But once the shares have been transferred, the parties need a second framework to regulate how they will own, govern and eventually exit the business together.

That framework is usually contained in the Shareholders’ Agreement, or SHA.

If the SPA answers the question "how does ownership change?", the SHA answers a different one: "how will shared ownership actually work after closing?"

Why would a seller remain invested?

There are several reasons why a seller may retain equity.

A buyer may want the founder to remain financially aligned with the future performance of the business. A private equity investor may require management to roll over part of its sale proceeds into the new holding structure. The seller may itself believe that the company has significant upside and prefer to monetise only part of its stake.

Sometimes the decision is driven by valuation.

If buyer and seller disagree about the company’s future potential, retaining equity can allow the seller to participate in the upside rather than forcing the parties to resolve the entire valuation gap at closing.

Consider a founder who owns 100% of a company valued at EUR 40 million. A private equity fund acquires 70%, while the founder retains 30% and continues to manage the business.

The founder has completed a significant liquidity event, but the relationship with the buyer has only begun.

From that moment, the most important questions are no longer just about price. They concern control, governance, information, future funding and exit.

That is the territory of the SHA.

Ownership percentage does not automatically determine control

One of the first misconceptions in shared ownership structures is assuming that percentage ownership tells the entire governance story.

It does not.

A shareholder holding 70% of the equity will normally have significant voting power, but the SHA may require consent from the minority shareholder for certain decisions.

These are commonly known as reserved matters.

They may include changes to the company’s constitutional documents, issuance of new shares, major acquisitions or disposals, borrowing above agreed thresholds, changes to the nature of the business, significant capital expenditure, related-party transactions, approval of budgets or appointment and removal of key executives.

The objective is generally not to allow the minority shareholder to manage the company day to day.

It is to ensure that certain fundamental decisions cannot be taken unilaterally by the majority where they could materially alter the minority shareholder’s investment.

The scope of reserved matters is therefore one of the most important negotiations in an SHA.

Too few protections may leave the minority economically exposed. Too many can make the business difficult to govern.

Board composition turns ownership into governance

The SHA will also normally address the composition of the board.

The majority investor may have the right to appoint most directors. The founder or minority shareholder may retain one or more board seats. Independent directors may also be contemplated depending on the transaction.

Board rights matter because they determine who participates directly in the strategic oversight of the company.

But board representation and shareholder veto rights should not be confused.

A minority shareholder may have one director on a five-person board and therefore lack the votes to block an ordinary board decision. It may nevertheless retain contractual consent rights over specified reserved matters.

The governance package needs to be analysed as a whole.

Who appoints the chair? Does the chair have a casting vote? What constitutes quorum? Can meetings proceed without the minority-appointed director? Which decisions require simple majority, supermajority or unanimous approval?

Small drafting choices can materially change the balance of power.

For advisers, the objective should be to create a governance structure that protects legitimate interests without turning every commercial decision into a negotiation between shareholders.

Information rights become critical for the shareholder no longer in control

A shareholder that does not control the company depends heavily on information.

The SHA may therefore provide rights to receive management accounts, annual budgets, business plans, audited financial statements and other operational information.

This is particularly important where the former owner has sold control but retained a meaningful economic stake.

Before the transaction, the founder may have had unrestricted access to every aspect of the company. After closing, that same person may legally be only a minority shareholder and, unless management responsibilities continue, no longer have automatic access to the same information.

The SHA needs to bridge that gap.

The appropriate level of reporting should reflect the size and nature of the investment. A 5% passive shareholder and a founder retaining 40% of the company will not necessarily require the same information rights.

The guiding principle is that a shareholder expected to remain materially exposed to the company’s performance should receive enough information to understand and monitor that exposure.

Future funding can become a source of conflict

A company may require additional capital after the acquisition.

That raises several questions.

Are shareholders required to provide further funding? If so, in what proportion? Is new capital introduced as equity, shareholder loans or third-party debt? What happens if one shareholder participates and another does not?

The SHA may address pre-emption rights, allowing existing shareholders to participate proportionately in new equity issuances.

This protects shareholders from involuntary dilution.

But sometimes dilution is exactly what the transaction structure contemplates if a shareholder does not provide additional capital.

Suppose the company needs EUR 10 million of new equity. The majority investor is willing to provide it, while the minority shareholder cannot or does not wish to participate.

Should the majority be able to subscribe alone and dilute the minority? At what valuation? Under what procedure?

These issues can become highly contentious if they are not anticipated at the outset.

A well-structured SHA should therefore consider not only the company’s current ownership, but also how that ownership may evolve.

Transfer restrictions: choosing your future shareholder

Private-company shareholders generally care deeply about who they own a business with.

The SHA therefore commonly restricts the ability of shareholders to transfer their shares freely.

A shareholder may be required to offer shares first to the other shareholders, obtain consent before transferring to a third party or comply with other agreed procedures.

These provisions serve an obvious purpose: the majority investor may not want to discover that the founder has sold its stake to a competitor, while the founder may not want the majority investor to transfer control to a counterparty it never agreed to partner with.

Transfers within the same corporate group may be treated differently, provided the shares are transferred back if the recipient leaves the group.

The precise mechanics vary, but the fundamental principle is clear: in private M&A, who the other shareholder is can be almost as important as how many shares each party owns.

Tag-along rights: protecting the minority on an exit

Suppose the majority shareholder later decides to sell its stake to a third party.

Without protection, the minority could remain invested alongside a new controlling shareholder it never selected.

A tag-along right addresses that problem.

It generally allows the minority shareholder to participate in the majority’s sale and sell some or all of its shares to the same buyer, usually on equivalent terms.

If a private equity fund owns 70% and the founder owns 30%, a tag right may allow the founder to sell alongside the fund when the fund exits.

From the minority perspective, this is an important liquidity protection.

It prevents the majority from monetising its position while leaving the minority trapped in an illiquid company under new control.

Drag-along rights: allowing a complete exit

The majority shareholder faces the opposite problem.

A strategic buyer interested in acquiring the company may only be willing to proceed if it can obtain 100% ownership.

If a minority shareholder can refuse to sell indefinitely, it may block the entire exit.

A drag-along right allows specified shareholders, once agreed conditions are satisfied, to require the remaining shareholders to sell their shares alongside them.

The minority is effectively "dragged" into the transaction.

Because the provision can force a shareholder to sell against its wishes, its terms are normally negotiated carefully.

The parties may consider the minimum ownership threshold required to exercise the drag, whether a minimum price applies, what representations minority shareholders must give, and whether they can be required to assume liability beyond their proportionate share of sale proceeds.

The provision must enable an efficient exit without unfairly exposing the minority to obligations negotiated principally by the majority.

Tag and drag rights therefore work together: one protects the minority’s ability to participate in an exit; the other protects the majority’s ability to deliver one.

Management shareholders create an additional layer of complexity

Where founders or executives remain shareholders and continue working in the business, ownership and employment become intertwined.

What happens if a manager resigns? Is dismissed? Retires? Dies? Leaves because of illness?

The SHA, often together with the management incentive documentation, may include good leaver and bad leaver provisions governing what happens to the manager’s shares in different departure scenarios.

The economic consequences can be significant.

A good leaver may be entitled to retain shares or sell them at fair market value. A bad leaver may be required to transfer them at a substantial discount or, depending on the structure and applicable law, at another contractually determined value.

These provisions are intended to align management with the investment thesis and discourage key executives from leaving prematurely.

But they require careful calibration.

An overly punitive structure may create incentives that are commercially counterproductive or legally problematic. A structure that is too generous may fail to achieve the intended alignment.

Again, the legal mechanism should support the commercial objective rather than dominate it.

Deadlock: what happens when shareholders cannot agree?

Shared ownership creates the possibility of deadlock.

This becomes particularly relevant in 50/50 structures or where minority consent is required for important decisions.

If the parties cannot approve the budget, appoint senior management or agree on a major strategic decision, the company cannot simply remain paralysed indefinitely.

The SHA may therefore include a deadlock mechanism.

The first stage is often escalation: the matter is referred from the board to senior representatives of the shareholders in an attempt to find a commercial solution.

If that fails, more significant mechanisms may apply.

Depending on the structure, the parties may agree to mediation, buy-sell procedures or ultimately a sale of the company.

The correct mechanism depends heavily on the relationship between shareholders.

A sophisticated institutional joint venture may tolerate a more structured deadlock procedure. A founder retaining a minority stake after selling control may need something quite different.

The objective should not be to design the most elaborate dispute mechanism possible.

It is to ensure that an unresolved disagreement does not destroy the value of the company.

Restrictive covenants protect what the buyer has acquired

Where a founder sells control but remains involved in the business, the parties will often negotiate restrictions concerning competition, solicitation of employees or customers and use of confidential information.

These covenants may appear in the SPA, SHA, employment documentation or a combination of them.

Their commercial rationale is straightforward.

A buyer paying substantial value for a business does not want the seller immediately establishing a competing operation and using the same customer relationships or team to undermine the asset just acquired.

At the same time, restrictive covenants need to remain proportionate and enforceable under applicable law.

Their scope, geography, duration and subject matter therefore require careful consideration.

This is another area where legal drafting should reflect the genuine commercial interest being protected rather than defaulting to the broadest restriction imaginable.

The SHA should be negotiated with the exit already in mind

One of the most useful advisory principles in negotiating a Shareholders’ Agreement is to think about the end of the relationship at the beginning.

How long does the majority investor expect to remain invested? Is the likely exit a strategic sale, secondary buyout, IPO or founder buyback? Does the minority expect liquidity at the same time?

The answers should influence the drafting.

A private equity investor with a five-year investment horizon may require strong drag rights and transfer flexibility to ensure that the eventual exit can be executed.

A founder retaining significant equity will focus heavily on tag rights, information, governance and protection against dilution.

The SHA should therefore not only regulate how the parties live together.

It should also regulate how they eventually separate.

In many cases, the success of the initial acquisition will only be fully determined when that second transaction occurs.

The advisory perspective: alignment matters more than control alone

It is easy to approach an SHA as a battle over control.

How many board seats does each side get? How many vetoes? Who can block what?

Those questions matter, but they can obscure the broader objective.

A successful shared-ownership structure should create sufficient alignment between the parties for the company to operate effectively.

If the majority can do virtually anything without consultation, the minority may feel economically exposed and disengage.

If the minority has veto rights over ordinary business decisions, management may become paralysed and the majority investor may be unable to implement the strategy for which it acquired control.

The strongest SHA is therefore not necessarily the agreement that gives one side the greatest number of rights.

It is the one that matches rights and protections to the economic reality of the transaction.

Who has invested the majority of the capital? Who is responsible for running the business? Who bears the downside? Who is expected to fund future growth? What is the expected exit?

The governance structure should reflect the answers.

When closing is the beginning rather than the end

In a full sale, closing often represents the point at which the seller’s relationship with the business largely ends.

Where equity is retained, closing can represent the beginning of a new relationship instead.

The seller becomes a minority investor. The buyer becomes a controlling shareholder. Management may become both employee and co-investor. Strategic decisions that were once unilateral must now operate within an agreed governance framework.

The Shareholders’ Agreement provides that framework.

It regulates control without necessarily equating it with ownership percentage. It protects minority shareholders without preventing the majority from running the company. It establishes rules for future funding, transfers and exits. And it anticipates what happens when shareholders no longer agree.

That is why, in partial acquisitions and rollover structures, the SHA should not be treated as a secondary document negotiated after the main deal is complete.

The SPA determines who buys the company. The SHA determines whether they can successfully own it together.