FIN-01-066

An Analysis of Shareholder Agreements

January 2002

Gilles Chemla, Michel Habib, and Alexander Ljungqvistr

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.

Classification: G34

Gilles Chemla
Institution: University of British Columbia, Vancouver BC V6T 1Z2, Canada
Telephone: (604) 822 8490
Fax: (604) 822 4695
Email: gilles.chemla@commerce.ubc.ca

Michel Habib
Institution: London Business School, Sussex Place, Regent’s Park, London NW1 4SA
Telephone: (020) 7262-5050
Fax: (020) 7724 3317
Email: mhabib@london.edu

Alexander Ljungqvist
Institution: Stern School of Business, New York University
Telephone: (212) 998-0304
Email: aljungqv@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~aljungqv/

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