An Analysis of Shareholder Agreements

34 Pages Posted: 5 Nov 2008

See all articles by Gilles Chemla

Gilles Chemla

Imperial College Business School; CNRS ; Centre for Economic Policy Research (CEPR)

Michel A. Habib

University of Zurich; Swiss Finance Institute

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

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Date Written: January 2002

Abstract

Shareholder agreements govern the relations among shareholders in privately-held companies, such as joint ventures or venture capital-backed firms. We provide an economic explanation for the use of put and call options, pre-emption rights, catch-up clauses, drag-along rights, demand rights, and tag-along rights in shareholder agreements. We view these clauses as a response to a problem of dynamic, double moral hazard, whereby the value of the venture depends on ex ante investments and ex post transfers. Contract clauses i) preserve the incentives to make ex ante investments and ii) minimize ex post transfers. We extend our framework to discuss the use of other clauses, such as the option to extend the life of a business alliance. (JEL: G34).

Keywords: Shareholder Agreements, Put Options, Call Options, Pre-emption Rights, Catch-up Clauses, Drag-along Rights, Demand Rights, Tag-along Rights

Suggested Citation

Chemla, Gilles and Habib, Michel A. and Ljungqvist, Alexander, An Analysis of Shareholder Agreements (January 2002). NYU Working Paper No. S-CG-01-04, Available at SSRN: https://ssrn.com/abstract=1295756

Gilles Chemla (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
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CNRS ( email )

Dauphine Recherches en Management
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Centre for Economic Policy Research (CEPR)

London
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Michel A. Habib

University of Zurich ( email )

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Zurich, 8032
Switzerland
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41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Alexander Ljungqvist

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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