The effectiveness of shareholders’ agreements

There is no acquisition or sale of a company or business without one or more shareholders’ agreements.

Why are shareholders’ agreements so necessary? Why are the Bylaws not enough?

In any case, it is convenient to begin by explaining what are the  shareholders’ agreements. They are those agreements entered into between all or some of the partners of a company in order to determine, modify or complete their internal relations, the rules that legally or statutorily govern such relations (Paz Ares). They are not part of the company’s bylaws. They remain only in the context of the relations between certain parties to the contract.

For the purpose of determining the effectiveness of parasocial agreements, we must differentiate three categories (This classification was conceived by Giorgio Oppo and later picked up by others such as Fernández de la Gándara, Madridejos Fernández, and others.

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Relationship Covenants

a) Relationship agreements. Those through which the partners regulate their reciprocal relations directly. And they do so without any type of intervention by the Company. Examples (ie. lock-up obligation, dividend redistribution clauses, valuation clauses, obligations to buy/sell shares/participations under certain assumptions, etc.).

As a rule, these are inter-party agreements. They are binding only for those who take part in them. They have no legal relevance for the other shareholders and the Company itself.

Attribution Covenants

b) Attribution Covenants.  Those covenants that try to provide the partnership with some advantage at the expense of the Partners. For example: The obligation of financing of certain Partners to the Company. Or the commitment of non-competition, concession of exclusive right of sale to the Company on products of the Partners, etc.).

In these cases, it is understood that the partnership can directly claim the performance of the obligation. And it can do so even if it is not a Party to the agreement. In any case it is advisable that they form part of the agreement. And all this based on the content of article 1257 of the Civil Code (contracts in favor of third parties), since the company, as beneficiary of the right in question, acquires it from the time the agreement was concluded (acceptance being necessary only to avoid revocation).

Organizational Covenants

c) Organizational agreements: those that directly affect the internal life of the Company, since they determine the organization and functioning of the corporate bodies (e.g., agreements on the composition of the administrative body, agreements on the information to be provided to the shareholders, on the dissolution of the company, quorums and voting majorities, etc.).

Again, in general, it must be understood that such agreements are not enforceable against the Company, since the shareholders, of their own free will, have segregated this type of agreement from the corporate contract (bylaws) either because they have not wanted to include it or because they have not been able to include their provisions in the bylaws.

Principle of non-opposability

In any case and as anticipated, the principle of non-opposability of certain covenants to the Company is not absolute. Both doctrine and jurisprudence (Judgments of the Supreme Court of February 26, 1991 and September 24, 1987 and Resolution of the General Directorate of Registries and Notaries of October 26, 1989) have been gradually admitting the breach of these principles when the following two circumstances concur:

Cases of Breach of the Non-Oppossibility Principle

a) When there is coincidence between the parties to the shareholders’ agreement and the parties to the partnership (i.e. – the shareholders’ agreement is subscribed by all the partners); and

b) When the results that could be obtained through the corporate law are equal or equivalent to those that could be obtained through the civil law (ie.- the compliance of a shareholders’ agreement can be demanded in civil proceedings through the action of compliance and the action of removal, so that, the result sought can be obtained by the means provided by the general contracting law, then, what prevents that such result can be obtained in a less painful way through a challenge of corporate agreements directly invoking the infringement of such agreement? )

Guarantees of Compliance

Finally, we should point out that, regardless of the general remedies that the legal system offers for the defense of the interests damaged as a consequence of the breach of a shareholders’ agreement[1], obviously, the parties can reinforce their commitments through guarantees that give them certain security in compliance (ie.- penalty clauses, purchase or sale options, proxies for the casting of votes, contribution of the syndicated shares to a community or a partnership, etc.) and even incorporate certain mechanisms in the corporate bylaws themselves (ie.- exclusion of the defaulting partner).

[1]Such as the action for compensation for damages, the action for compliance, the action for removal (consisting of “undoing what has been wrongly done”), the action for termination, and even, in certain cases, the challenge of corporate resolutions (based on the damage to the corporate interest for the benefit of one or more partners).

If this article has been of interest, we also suggest you to read the following article published on our website: Shareholders’ Agreements vs. Bylaws: Which prevails?

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