Publication date: November 14, 2024
The company agreement (Articles of Association, shareholder Agreement) is a very unusual type of agreement. It not only creates obligations between the parties, but also creates a completely new legal person – a company. Although the full creation of a company requires other activities, primarily an entry in the National Court Register, the company agreement defines the way it operates, its goals and the shares it consists of. It is for the company what the constitution is for the state.
Therefore, its content is subject to special statutory requirements. In the case of a limited liability company, they are exhaustively specified in the Commercial Companies Code in Article 157. First of all, it must be concluded in the form of a notarial deed. This increases legal control over its content, because the notary must ensure that all its elements are in accordance with the law. In addition, the company’s articles of association must contain the following mandatory elements:
Failure to meet the above-mentioned requirements may result in the invalidity of the agreement or the rejection of the application to enter the company in the register by the court.
Despite many imperative provisions of the Commercial Companies Code, the content of the company’s agreement depends primarily on the will of the shareholders. In the Polish legal system, one of the foundations of civil law is the principle of freedom of contract. It is defined in Article 3531 of the Civil Code and is applied to company agreements by referring to the provisions of the Civil Code through Article 2 of the Commercial Companies Code. This means that shareholders may include any provisions in the company agreement as long as they are consistent with the law, the nature of the company, or the principles of social coexistence.
In practice, the most important issues of the agreement will depend on the shareholders. They have wide freedom in creating the functioning of the future company. The Commercial Companies Code only specifies the mandatory minimum that must be included in every agreement. The remaining elements are decided by the shareholders, who have wide freedom in creating the agreement.
This freedom applies to various elements of the company’s operations. First, its purpose. Capital companies do not have to operate for profit. They may have a different purpose established by the shareholders. Second, freedom in creating the so-called corporate governance. Although the Commercial Companies Code specifies what bodies each company must have, the division of some duties is in the hands of the shareholders. For example, the agreement will determine whether the Management Board or the Supervisory Board will have the dominant role. Third, the relationship between the shareholders. In accordance with the purpose of the law of obligations, the relationships and duties between the shareholders are created by them. They can grant themselves additional rights or impose duties on themselves. These issues will also determine the division of profits and losses.
Business practice has developed many accepted and proven solutions that can be used when concluding a company agreement. They often appear in company agreements. Using proven solutions helps in running a business, because a company needs stability to thrive, and it is best provided by proven solutions and it facilitates contact with other entrepreneurs who are also familiar with this practice, and therefore know what to expect.
It is also worth remembering that clauses generally concern matters not regulated by the Act or matters in which the Act presents only a model solution that the parties may modify. Therefore, the names of clauses are not statutory terms. Their names are more the result of the practice that gave them to facilitate their knowledge and better cataloguing. However, these names are in no way binding on the parties to the contract.
They may also differ in content. The division into types of clauses often applies only to the area of matter they concern. Shareholders have complete freedom in creating their details and adding new solutions.
The share held by a shareholder in a limited liability company is generally transferable. This is related to the nature of a limited liability company as a capital company. In a capital company, the essence of its functioning is capital. Although they can be established for a permitted purpose consistent with the law, their purpose will usually be to trade and increase their capital. This capital is liquid, it can increase if the company is doing well or decrease in the event of a crisis. Therefore, it is obvious that the shareholder’s share (or the shareholder’s shares) must be transferable. Trading in them is a form of trading in the company’s capital.
The general rule is that a share is transferable. However, there are regulations regarding the form of transferring a share. In the case of a limited liability company, the code requires that the transfer take place in the form of a notarial deed.
The possibility of disposing of a part of a share also depends on the type of share. According to Article 153 of the Commercial Companies Code, if shareholders can have more than one share, these shares are indivisible. Therefore, it is not possible to dispose of only a part of it. A contrario, if shareholders can have only one share each, it is divisible, so it is also possible to dispose of a part of it. This is confirmed by Article 181 of the Commercial Companies Code. However, it introduces a restriction that as a result of the division, shares cannot be created with a value lower than PLN 50, i.e. the minimum statutory value of a share.
There are, however, exceptions when the law prohibits the transfer of a share:
These rules are mandatory, so they will always apply to the company and cannot be excluded by agreement. However, these restrictions apply to exceptional and rare situations and function as exceptions to the general principle of transferability of shares.
Although the transferability of shares cannot be excluded in the articles of association, it can be limited. Such a restriction must be included in the articles of association. These restrictions are intended to protect other shareholders from a possible hostile takeover, i.e. a sudden domination of the company by a new investor. They are also intended to provide them with influence over the selection of other shareholders and control over what other shareholders do with their shares. The purpose of this is to limit potential losses to the company caused by arbitrary decisions by one shareholder.
The Commercial Companies Code provides an example of such a restriction in Article 182, paragraphs 3-5. This is the so-called requirement for consent by other shareholders. This procedure consists in the fact that in the event that a shareholder wants to dispose of his share, he needs the consent of the company’s management board. The lack of such consent is the basis for the shareholder to apply to the registry court for consent, if there are important reasons for this. The court should always assess this individually for a given case, but the doctrine has adopted several examples of reasons: harassment of the shareholder, lack of possibility of cooperation between shareholders and even unfavourable financial situation of the shareholder. If the court grants such permission, the company may present another buyer, within the time limit set by the court. If the company does not find such a person or the new buyer does not pay the due price, the shareholder may fully freely dispose of his share regardless of previous restrictions. This procedure may be freely modified in the agreement and the parties may increase or decrease its stringency. For example, the body issuing the consent may be the supervisory board or even the shareholders’ meeting.
Similar provisions in the Commercial Companies Code are found in the case of the sale of shares in joint-stock companies (especially private ones). Since they are also capital companies, trading in shares is a natural part of their functioning. The Code similarly prohibits the prohibition of the sale of shares (apart from exceptions) but specifies the possibility of including additional restrictions in the company agreement and the company’s statute. They therefore operate accordingly as in a limited liability company.
Apart from this exemplary form, the Code leaves the parties free to create restrictions or additional rules for trading in shares. For example, they can establish additional requirements, introduce special conditions or deadlines or establish a minimum price at which a share is to be sold. These rules can apply to all shares or only to selected ones. Here, shareholders can commit to any requirements and will be limited only by compliance with the act, the nature of the company and the principles of social coexistence. This is a classic example of freedom of contract.
It should be remembered, however, that a restriction, in order to be consistent with the nature of the company and the principles of social coexistence, cannot be excessively difficult, e.g. too long a period. The contractual clause defining the restriction must be written precisely and cannot allow for the fraudulent blocking of the procedures for permitting the transfer. This would be a circumvention of the law and could indirectly lead to the exclusion of the transferability of the share. The presence of such a clause may be the basis for rejecting the company’s entry in the register.
There are a number of clauses that have been developed in practice that introduce various forms of restrictions on the transferability of shares. An example of such a restriction on the transferability of shares are tag along and drag along clauses.
A tag along clause is a so-called “joining” clause. It means that if one shareholder wants to sell his share, another shareholder in whose favor the tag along clause has been established can join him and then he must sell not only his shares but also the joining shareholder.
Example: Kyoto Sp. z oo has 5 shareholders: A, B, C, D, E. The articles of association established tag along clauses for A and B. One day D decided to sell his share to F. According to the clause, A and B can join the transaction. This is their right, which they can, but do not have to, use. B did not need to sell his share, but A did exercise this right. This means that A will join D selling his share, so D will have to sell his share as well as A.
Joining the seller allows the shareholder to cash in their shares in an easy way. In some situations, this can be more beneficial than staying in the company. When the future of the company is uncertain, for example due to new investors, this right can be used to easily escape from the company.
The shares of a shareholder using a tag along clause should be sold at a price equal to or no lower than that of the shareholder he joins. This principle is derived from the main purpose of the clause, which is to protect the shareholder.
A shareholder who sells his shares, knowing that other shareholders are entitled to a tag along clause, should notify those shareholders of the sale in advance, so that they have time to use the clause. Selling a share without informing others may result in the shareholder being liable for damages. The shareholder whose rights were violated may claim it on the basis of art. 471 of the Civil Code and possibly 415 of the Civil Code, but in practice this will usually come down to only paying a contractual penalty. Deliberately notifying shareholders of the planned sale so that they do not have time to think about using the tag along clause may be perceived as an attempt to circumvent the clause, and therefore also equal to liability for damages.
The tag along clause is primarily beneficial for minority shareholders. It serves to protect their interests in the case of transactions involving majority shareholders. Under normal circumstances, acquiring minority shares may seem unattractive, so the shareholder will have a big problem finding a buyer. However, thanks to the tag along clause, he will be able to join the transaction of the majority shareholder. For example: Shareholder A has 5% of the shares, but tag along clauses have been included in the company agreement for his benefit. An external investor has concluded an agreement to purchase the shares of the majority shareholders. After the transaction, he will own 67% of all shares, i.e. a significant majority, and he will de facto manage the company. Under normal circumstances, the investor would not buy A’s shares because without them he will already have an absolute majority, but thanks to the right from the tag along clause, A can join the transaction and thus the investor will also have to buy A’s shares. Thanks to the clause, A’s interest is protected.
The above example also shows the second meaning of this clause. It is to protect shareholders from a hostile takeover, a situation where suddenly most of the shares are taken over by an outsider. The clause allows such people to leave the company quickly by selling their shares earlier. The clause may also discourage a buyer who will not have all the funds to buy all the shares.
Example: There are three shareholders in a company, A, B and C. C wants to sell his shares to D. B is in conflict with D so he does not want to be a shareholder in the same company with him. B can then exercise the right under the tag along clause. Thanks to this, he can leave the company by selling his share and does not have to share it with D.
An important issue when establishing a tag along clause is whether the “attached shares” are to be counted proportionally or complementary to the whole?
Example: Shareholder A has 400 shares and B has 100 shares. Buyer C wants to buy 200 shares from A. He doesn’t have the funds for more. B has a tag along clause right that he wants to use. The question is how should the sold shares be counted?
There is no clear answer as to which counting system is better. In practice, the difference between them will be the strength of the position of the buyer of the shares or the shareholders selling them. When including tag along clauses, it should always be clearly stated how the shares should be counted. Such an important issue cannot be left to chance.
The opposite of the tag along clause is the drag along clause. This is the so-called “attraction” clause. It gives a shareholder or group of shareholders the right to demand that the other shareholders join in the transactions they are making. It can therefore be said that a shareholder selling shares “attracts” the other shareholders with him. The other shareholders are therefore de facto forced to sell their shares. The transaction can even take place against their will.
Example: There are 4 shareholders in a company: A, B, C, and D. A drag-along clause has been established in the company agreement in favor of B. B has found an investor who would be willing to buy shares from him. B can exercise his right and force the other shareholders to sell their shares along with him.
The drag along clause has a stronger impact on the balance of the company than the tag along. While the tag along limited the freedom of only the shareholder selling his share, the drag along clause gives control over all the other shareholders. In an extreme situation, this can lead to one arbitrary decision by a minority shareholder selling the entire company to an unknown person.
The drag along clause serves to protect the interests of majority shareholders and professional investors. It allows for easy control over the sale of minority shareholders’ shares. The future of the company will depend on the person in whose favor this clause was established. He or she can use this clause to create tensions and influence the decision of other shareholders at the shareholders’ meeting or even board members.
On the other hand, it can be beneficial for a professional investor. In a situation where he would like to acquire an entire company, he does not have to conduct separate talks with all the shareholders, but only with one specific one.
So what is the point of a drag-along clause if it has such a strong impact on shareholders? It can be very beneficial for investment exits. In a situation where a company consists of several dozen shareholders and a takeover of the company by one investor is planned, there may be difficulties in negotiations. Based on life experience, there is no agreement that would please everyone. Thanks to the clause, it will be possible to limit decision-making to a smaller number of shareholders or even just one. This will make negotiations much easier.
In practice, a drag along clause is established over the main shareholder who holds the majority of shares to better control the company.
Example: A wants to establish a company dealing with new technologies. We find investors in the form of B, C and D. A has 70% of the shares and the others 10% each but have a privileged dividend. A de facto runs the company alone. After a few years of operation, he was contacted by E who wants to buy the company at a favorable price. A has a drag along clause. Therefore, he does not have to consult with the other shareholders, but conducts the negotiations himself and then, by selling his shares, uses the right from the clause. This is more practical than conducting negotiations with the other shareholders who do not even know what is happening in the company.
The drag along clause gives a lot of power to the chosen shareholder. It seems right to limit his rights under the clause. In practice, this usually involves giving him additional requirements when concluding a transaction, e.g. he cannot go below the agreed price, he can only use this right a few years after joining the company.
A popular solution in practice is also the requirement of a sufficient majority of shareholders supporting the transaction in order to be able to exercise the right from the clause. In this case, the nature of this clause changes completely. The decision does not depend on the arbitrary decision of one person, but on the considered expression of consent by the majority.
The drag along clause can also operate in situations where a shareholder does not sell all of his shares. The question is how will the proportionality principle operate? In such a situation, there are a couple of possibilities:
In a company, shareholder A has 100 shares, B has 200 shares, C has 300 shares. A drag-along clause has been established in favor of B. B has found an investor who would be willing to buy half of B’s shares if he can bring other shareholders along. Depending on the content of the clause, this can have different effects:
It is worth noting that in both situations the investor acquires the same number of shares. Therefore, using this clause will always be beneficial for him.
A lot of controversy can arise when one shareholder uses the drag-on clause to force another shareholder to sell all of his shares when he himself has a few left. Such a right can be abused. Therefore, when concluding a drag-along clause, it is necessary to take into account such a situation and determine in advance how to proceed in such a situation. For example, it can be specified that the minority shareholder must give up only a proportional number of shares. The clause should be drafted in such a way that its use causes the least possible number of conflicts.
Thanks to the freedom of contract, other shareholders can protect themselves against the use of the drag along clause by constructing it appropriately. This will usually concern the additional requirements mentioned above. There are also other ways to protect yourself. An interesting option seems to be the establishment of a pre-emptive right to a share or a priority right to acquire a share. For example:
There are 3 shareholders in the company: A, B and C. A drag-along clause was established in favour of B. In addition, a priority right to acquire B’s shares was established in favour of the other shareholders. B found an investor whose shares he wants to buy from him on the condition that he drags the other shareholders along with him. B exercises his right under the drag-along clause and wants to drag the other shareholders along with him. However, A exercises his priority right and acquires B’s shares before the investor.
This safeguard allows the remaining shareholders to maintain control over the company and minimises the arbitrariness of the use of the clause.
The presence of both a drag along clause and a right of priority to acquire may raise conflicts as to which of them is more important. It seems right, therefore, that it is necessary to establish in advance in the contract what should be done in the event of a potential conflict between these two rights. It is better not to leave this situation to chance.
Both clauses have found wide application in practice in startups. In startups, the inflow of new investors and the outflow of old ones is a regular thing. So, to protect their interests, many of them decide to include clauses regarding the sale of shares, to better control this sale and ensure certain turnover of shares. Startups are risky investments and often do not pay off, which is why shareholders are so keen to ensure the greatest possible stability.
Due to its nature, a startup company actually has two types of shareholders:
In such a configuration, it is often the first group that is responsible for the day-to-day management of the company, while the second group focuses more on supervision and whether the company will ultimately generate a profit. Both the drag along and tag along clauses fit perfectly into such a relationship. Here are practical examples of their use:
Tag along and drag along clauses are an example of the influence of business practice on the creation of articles of association. They are a response to the emerging need to protect the interests of some shareholders in the event of a transfer of shares. They introduce solutions that give influence on this transfer, through the possibility of joining in the transfer of a share by another shareholder or forcing other shareholders to transfer their shares with our own.
Both clauses are the opposite of each other. Tag along is intended to protect the interests of minority shareholders, giving them guarantees that they will be able to leave the company efficiently, having secured their profit and being able to easily cash in their shares. It limits the freedom of the remaining shareholders to leave the company. Its opposite is drag along, which gives power to one shareholder, usually the majority shareholder, over the remaining shareholders. He can pull them along and thus force them to sell their shares. This favors his position and is intended to protect primarily his interests as well as the interests of the future investor.
When examining the issue of these clauses, it is important to remember that they are related to the freedom of contract, which is so important for private law. The shape of both of these clauses is determined by the shareholders and they can freely create obligations towards each other with them. Therefore, when including such clauses, their content must be carefully constructed to minimize conflicts that may arise in the event of their application. Both clauses violate the equality of shareholders, which can lead to tensions. Therefore, determining their content in advance is so important.
Tag along and drag along clauses are often used in practice. They are especially used in startups or investment agreements. Therefore, when dealing with this topic, it is necessary to familiarize yourself with these clauses, understand both their purpose and operation. They are an integral part of this type of entrepreneurship.
Tag along:
The Right of Attachment will include the Shares of Investors exercising the Right of Attachment on the following terms:
i) in the event of the sale of the Transferred Shares by the Transferring Partner to an entity that is not a Competitive Entity, the Investors have the right to sell the Shares they hold in a number proportional (pro rata) to the shares sold by the Transferring Partner;
ii) in the event of the sale of the Transferred Shares by the Transferring Partner to a Competitive Entity, the Investors have the right to sell all the Shares they hold.
a) Transfer of ownership of the Shares of the Person Pulled for Sale to the Indicated Purchaser, and
b) Paying to the Person Invited to Sale the full price for the Shares sold by him in the exercise of the Invitation to Sale.
a) a request addressed to each of the Parties Invited to Sale to sell all shares held by each of the Parties Invited to Sale to the Indicated Purchaser;
b) the price for all shares (i.e. shares constituting 100% [one hundred percent] of the Company’s share capital) under the Invitation to Sale;
c) the price for the shares sold by individual Invited Parties under the Invited Party.