In my experience as a corporate lawyer, clients often seek my advice when they are already involved in a shareholder dispute. In these situations, one of the first questions I ask is whether a Shareholders’ Agreement is in place. Unfortunately, the answer is often no.
The purpose of this article is to provide an overview of the main matters that can be regulated in a Shareholders’ Agreement and some of the mechanisms that can be used to strengthen its enforcement.
Nature and purpose of a Shareholders’ Agreement
A Shareholders’ Agreement is an agreement entered into by all or some of the shareholders of a company to regulate their relationship and supplement the provisions of the Articles of Association.
Its content will depend on the characteristics of the company and the needs of its shareholders. It may cover matters ranging from the operation of the corporate bodies to the transfer of shares, the entry of new investors or the exit of existing shareholders.
What matters can it regulate?
Some of the most common matters that may be regulated in a Shareholders’ Agreement include:
- Operation of the General Shareholders’ Meeting and the Board of Directors: enhanced majorities, reserved matters, composition of the management bodies and veto rights.
- Transfer of shares: lock-up periods, pre-emption rights, tag-along rights and drag-along rights.
- Non-compete obligations: defining the activities that shareholders may carry out while they remain involved with the company and, where appropriate, following their exit.
- Dividend policy: establishing criteria for the distribution of profits.
- Deadlock situations: mechanisms designed to prevent disagreements between shareholders from paralysing the company.
Shareholders’ Agreement vs. Articles of Association
One of the main advantages of a Shareholders’ Agreement is that, unlike the Articles of Association, it is not subject to public disclosure through the Commercial Registry and therefore allows the parties to regulate their relationships with greater flexibility than the Articles of Association.
Another important difference lies in their legal effect: a Shareholders’ Agreement is contractual in nature and, as a general rule, is binding on those who enter into it, whereas the Articles of Association establish the basic legal framework governing the organisation and operation of the company and, once registered with the Commercial Registry, are subject to the statutory rules on public disclosure and enforceability against third parties under Spanish company law.
Freedom of contract and its limits
Shareholders’ Agreements benefit from considerable flexibility under the principle of freedom of contract established in Article 1255 of the Spanish Civil Code. However, this freedom is not absolute: its provisions must comply with the limits established by the applicable legal framework.
Protection and enforcement mechanisms: penalty clauses, vesting and leaver provisions
The value of a Shareholders’ Agreement depends not only on the obligations it establishes, but also on the mechanisms put in place to protect the shareholders’ interests and reinforce compliance with those obligations. Some of the most common include:
- Penalty clauses: these allow certain financial consequences to be established in advance in the event of a breach of specific obligations.
- Vesting mechanisms: these allow the vesting of certain rights over shares to be linked to the passage of time or the achievement of specific milestones.
- Good leaver and bad leaver provisions: these allow different consequences to apply depending on the circumstances in which a shareholder leaves the project. Exit terms may vary depending on whether the departure is based on a justified reason or, conversely, results from a breach of the obligations undertaken.
Conclusions
A Shareholders’ Agreement cannot guarantee the absence of disputes. It can, however, ensure that shareholders have agreed in advance on the rules that will apply when particularly sensitive situations arise. In this respect, establishing the rules of the game from the outset provides greater certainty for shareholders and may avoid significantly more complex negotiations once their interests are no longer aligned.
For this reason, my recommendation is not to wait until a problem arises before negotiating a Shareholders’ Agreement. The beginning of a business venture or the entry of a new investor are often particularly appropriate times to agree on the rules governing decision-making, continued involvement and exit.
At FNM Legal, I advise companies, business owners and shareholders on the preparation and negotiation of Shareholders’ Agreements tailored to the characteristics of each project and the needs of its shareholders.
The contents of this website are provided for information purposes only and do not constitute legal advice.