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Shareholders' agreements

Shareholders’ Agreements vs. Bylaws: Which prevails?

When a company is incorporated, it must contain bylaws in accordance with Article 22 of the Capital Companies Law (in Spanish, "Ley de Sociedades de Capital", "LSC"). The Law does not contemplate as an indispensable requirement the existence of pacts between the partners. But what happens when there are shareholders' agreements vs. bylaws, which prevails?

First, we will explain what are shareholders’ agreements?

Shareholders’ agreements are agreements between all or part of the partners of a Company.  By means of which they try to modify or complete their relationship. Likewise, the legal or statutory rules governing such relationships are also modified.

They are, therefore, covenants that belong to the scope of the relations of those who sign them.  Therefore, we can say that they are binding exclusively on the parties who sign the agreement in question.

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Second, what types of shareholders’ agreements are there and how effective are they?

In this way we can differentiate three types of shareholders’ agreements:

1.- Those that regulate the relations between partners without the intervention of the Company. Examples:

  • Obligation to lock up or prohibition of sale.
  • Dividend redistribution clauses or preferential returns.
  • Purchase or sale obligations under certain circumstances.

In general, such agreements only bind those who participate in them. That is, they would not bind the rest of the partners or the company itself.

2.- Those that try to procure some advantage in favor of the company and at the expense of the partners. Examples:

  • Obligation of financing by one or more partners to the Company.
  • Obligation of non-competition of the partners in favor of the Company.
  • Granting of exclusive sales rights to the partnership on products owned by a Partner.

In these cases, the Company can directly claim performance from the one who assumed the obligation in question. Even if he is not a Party to the agreement in question, which would in any case be advisable.  Only acceptance avoids revocation.

3.- Those that regulate the organization and operation of the corporate bodies. Examples:

  • Agreements on the composition of the administrative body.
  • Those relating to the quorums and voting majorities in the general meeting of the Company and its Board of Directors.
  •  Or on the ordinary day-to-day management of the Company.

Again (and without prejudice to exceptions in doctrine and jurisprudence) such resolutions are only binding on those who participate in them.

The third relevant point is the reflection of shareholders’ agreements in the bylaws.

Sometimes, shareholders’ agreements are not reflected in the bylaws.  This can occur because they deal with matters that are not included in the bylaws. Or because they contain regulations that cannot access the Commercial Registry because they are contrary to the Regulations of the Commercial Registry.

It is possible, therefore, that there are valid clauses that cannot be registered. And, therefore, the wording of the bylaws and the contract between partners may differ on these points.

Said clauses, we reiterate, a priori perfectly valid, will not be enforceable against third parties because they do not enjoy registry publicity.

However, in order to ensure that they are effective, the parties must include a clause in the contract. Such clause must establish the prevalence between the parties of the content of the contract agreed by them. This over the content of the registered bylaws when such content may be discrepant.

As a conclusion, then, parasocial agreement or bylaws?

We understand that, as far as possible, it would be optimal for such parasocial agreements to be reflected in the bylaws. This is in order to avoid discrepancies and for such agreements to be enforceable both between the parties and against third parties.

However, as already indicated, sometimes it is not a matter of choice.

In such cases, the parties can reinforce their commitments by means of guarantees that give them some security of performance.  For example, penalty clauses, call and put options, proxies for the casting of votes, etc.  And they can even incorporate certain mechanisms in the articles of association (exclusion of the defaulting partner).  And this, beyond the general remedies offered by the legal system (enforcement action or termination).

If this article has been of interest, we also suggest you to read the following article published on our website: Binding or non-binding nature of Letters of Intent

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