Shareholder Agreement - the key element among the founders

May 10, 2022

Shareholders’ Agreement: The mother of all start-up agreements

In this article we outline for you some essential points of the Shareholder Agreement (“SHA”) which the start-ups in Switzerland most commonly need to consider. The SHA can fairly be referred to as the mother of all agreements in the company’s funding structure. At the early stage, as the new business develops fast, founders often forget to take possible future developments into consideration or decide to think of the “darker days” at some point later. However, the SHA is not an instrument to go through the difficult times. In fact, there are numerous scenarios that can impact the founders, investors, and even staff in case the venture develops quickly and the growth exceeds the expectations. While some financial aspects of your company’s life are beyond its control, a founder does not want to lose additional control because of internal legal concerns. The shareholders' agreement lays out the ground conditions for all parties involved, including current shareholders. So, while under the Swiss law is not compulsory to have a SHA, it renders the business relationship with the relevant stakeholders significantly more structured and secure. This is especially true since as the companymatures and powerful professional investors come into play, the density of regulation in the SHA typically increases.

Here are the essential elements of the standard SHA:

Voting Rights

The SHA will determine which management decisions will require a shareholder’s decision and hence the need to vote.

The voting rights of each shareholder will depend on the class of shares which she holds. These are important features of the company to be determined, as they will form the decision-making structure of the company. SHA will determine and illustrate the voting right of each shareholder of the company (this alone might be a complex enough question given that three different classes of shares are provided for under the Swiss law, each of the classes associated with different regulation with respect to the voting , dividend, and liquidation rights).

Seat on the Board of Directors

The SHA will establish the number of the board of directors, their rights in the decision making (e.g. sole signature or signature of two), and the limits of the latter. It will also determine what number of shares, and of which class, will open the door to a seat on the Board of Directors. Not uncommon is to foresee who of the founders shall have the right to be on the Board of Directors.


Each shareholder has an economic right and participation right in the company. All shareholders of a stock corporation have these rights unless it has been modified by the articles of incorporation of the company. These rights are usually set out in a clause of the SHA.

The economic rights which typically depend on the capital contribution of the respective shareholder, include the right to receive dividends. Dividends regulate what percentage of profits should go for provisions, what percentage should go for reserves, and what percentage will be distributed as dividends to the shareholders. This clause will also determine when the company does not have to pay out dividends.

Liquidation Preferences

A Liquidation Preference is defined as the mechanism which determines the distribution of liquidation proceeds in case of a liquidity event (sale, liquidation, merger, reorganization, change of control or IPO) among the shareholders. With a liquidation preference, one or more shareholders will be paid in preference to the other shareholder(s). In other words, the liquidation preference works like a waterfall from which the distribution of liquidation proceeds is first diverted to the preferred shareholders, and only if there are any liquidation proceeds left, the remaining shareholders will receive their pro-rata part.

Therefore, it is important to define and set out the liquidation preferences clause as clearly and comprehensively as possible in the SHA or even in the article of association in order to avoid any potential conflicts between shareholders of the same company.

Future Share Transfers

The clauses regulating the future share transfers are, in essence, preventive measures for any potential disagreementsbetween the shareholders during a sale or purchase of shares company.

The different means of future share transfers are listed below:

First Refusal Right

In case one of the shareholders decides to sell all or part of his or her shares, with the right of first refusal the other stakeholders are given the first opportunity to purchase available shares. In other words, this clause prevents the shareholders from selling their shares to a third party without first consulting current co-investors and/or existing shareholders.

Similar to the right of first refusal is the purchase option clause, which also enables shareholders to buy shares from other shareholders if specific triggering circumstances occur. Here, it is not necessary that a shareholder is actively seeking to sell his or her shares. Rather, any other triggering event can be included into the SHA for the purchase option to used (for example, death or insolvency).

Tag-Along (Co-Sale Right)

The concept of tag-along right (also known as a co-sale right) protects minority shareholders in the event that a large stake in the company is sold. In fact, the minority shareholders will usually not be represented at the negotiating table and hence have little influence during this sale process. In other words, the minority shareholders might not be able to sell their shares. The tag-along provision ensures that minority shareholders have the same ability to sell their shares as the majority shareholders.

Drag-Along (Co-Sale Obligation)

Drag-Along Rights are primarily intended to protect the majority shareholders by forcing minority shareholders to join them in the sale of the company. It is not uncommon that the potential buyer is only interested in buying out all of the current shareholders. Bring-Along Rights clause thus simplifies the sale of a company in case the majority of shareholders(the exact number can be freely defined in the SHA) votes in favor of selling.

Limits of the SHA

Under the Swiss law, the SHA only acts as a contract between the shareholders, and not between the shareholders and the company itself. If a shareholder violates the SHA, for example by violating the voting agreement, from a corporate law perspective the resolution is still valid, provided that the requirements set forth in the Code of Obligations and the articles of association of the Company have been met. Similarly, a sale of shares would be valid under civil law, even if the shareholder violated the restrictions on the transfer of shares set out in the SHA. Therefore, the most frequently used means of admonishing the shareholders to comply with the SHA is the contractual penalty.


The SHA increases clarity in the relationship within the founder’s team and aims at regulating their relationship in the future with respect to the circumstances which are not immediately apparent in the early stages of the venture’s lifetime. The practice has proven the relevance of the common SHA content described above which might come into play earlier than the founders would ever expect. Thus, if concluded early enough, the SHA will help in avoiding unnecessaryexpenses and disagreement between the shareholders in the future.

Back to posts