Once you start a business, you are in for a roller coaster ride! This will produce many situations which could lead to disagreement, and even conflict, between shareholders. This is true even if the shareholder’s are family members or have known each other for years. Starting your business with a shareholder’s agreement in place will help business partners avoid conflict and provide a road map for conflict resolution.

What is a shareholder’s agreement?

A shareholder’s agreement is a document agreed upon, and signed, by all shareholders in a business venture. In Spain, a shareholder’s agreement is called a pacto de socios and refers to an agreement between all parties involved in a business venture, regardless of the structure of the business.

In English, this document is called a shareholder’s agreement for all corporations (S Corps and C Corps). The document is called a membership agreement for limited liability companies (LLCs). To make things easy, this article will refer to both of these as a shareholder’s agreement.

It is important that all rules are put in writing and approved by all business partners. These written rules will govern the actions of all shareholders in the business. In this respect, a shareholder’s agreement gives the business great scope for self-regulation.

Is a shareholder’s agreement required by law?

Spanish law (nor US or UK law, for that matter) does not require a company to have a shareholder’s agreement. However, we strongly recommend that a shareholder’s agreement is created when a business is started or if new shareholders enter the venture.

The shareholder’s agreement is binding only for those that sign the document. Signatories will have the right to take legal action if another signatory breaches any clause in the shareholder’s agreement. This includes demanding compensation for any damages that may be incurred and forcing all parties to adhere to the terms of the agreement. The shareholder’s agreement loses its efficacy when the shareholders interact with third parties.

It is not necessary to enter a shareholder’s agreement into the public record (the escritura). The signature of all parties makes the document legally binding. If you want to modify any portion of the shareholder’s agreement, it must be approved by all signatories.

What should be considered when drafting a shareholder’s agreement?

1– Good corporate governance

The shareholder’s agreement is a set of rules that will help resolve future conflicts or blockages that may occur in decision making in corporate bodies.

2– Commitment level and duties of each partner

You should put in writing the time each partner will commit to the business and everyone’s specific tasks.

3– Non-compete clause

This establishes that none of the partners will work for a competitor or take an economic interest in any endeavor that undertakes any economic activity similar to that of the business.

4– Addition of new partners/shareholders

The agreement should contain clauses that provide for the addition on new shareholders. It should state if new shareholders or investors will enter the business with the same terms and conditions as the existing shareholders, or if they will have different terms and conditions.

5– Departure of new partners/shareholders

It is also important to determine in advance the procedure for a partner/shareholder to exit the business. It is important to include clauses that state whether the rest of the partners/shareholders have pre-emptive rights to acquire the shares of the exiting partner.

It is also important to stipulate Drag-Along and Tag-Along rights.

Drag-Along Rights

This is a clause that protects the rights of the majority shareholder. If a third party offers to purchase the company, they usually want 100% ownership.

If a third party offers to purchase the entire company, a Drag-Along clause requires minority shareholders to sell their shares in the company. The majority owner must give the minority shareholder the same price, terms, and conditions as any other seller.

Tag-Along Rights

This is a clause that protects minority shareholders.

If a third party offers a shareholder to purchase their shares, the rest of the shareholders may tender their shares to the third party, under the same terms and conditions. The third party may then purchase the number of shares they initially desired, on a pro-rated basis, from all shareholders who exercised their Tag-Along right.

Conclusion

This article details some of the clauses you can include in your shareholder’s agreement. However, they are not the only ones. There are many possibilities and you should always keep in mind their future efficacy in conflict resolution and the ability for your company to self govern.

Do you need help drafting the best shareholder’s agreement for your company? If so, don’t hesitate to contact us today for help.