30 Jan Tools for Protecting the Business: Shareholders’ Agreements and Family Protocols

Anticipating conflicts and establishing clear rules on decision-making, the entry and exit of shareholders, or how generational transitions are to be handled is essential to provide stability and continuity to any business project. More than that, it is often a matter of business survival.

To this end, there are two key legal instruments which, although closely related, are not identical and do not serve exactly the same functions, but are clearly aimed at the same objective: the shareholders’ agreement and, in the context of family-owned businesses, the family protocol.

What Is a Shareholders’ Agreement?

As we have explained in previous publications, a shareholders’ agreement is a private agreement entered into by the shareholders of a company to complement its articles of association. It can be described as a tailor-made suit for the company, as it allows for a high degree of flexibility in regulating matters that the articles of association, by their very nature, do not usually (and sometimes cannot) address in sufficient detail.

Its content is heterogeneous and may regulate, among other matters: rules relating to ownership (such as transfers of shares or interests, restrictions on the entry of third parties, exit mechanisms for shareholders, and clauses governing sale and acquisition transactions — tag along and drag along clauses), rules on business management and corporate governance (including criteria for joining the company, remuneration and performance policies, dividend distribution, qualified majorities, etc.), as well as dispute resolution mechanisms.

The Family Business Context

Family businesses, although they do not constitute a specific legal form, operate in practice as a universe of their own. Three spheres overlap: the family, the business and its management. This overlap gives rise to a coexistence of economic interests and personal relationships which, at times, reinforce one another — and at others, come into conflict.

For this reason, in family-owned companies the shareholders’ agreement is typically articulated through a family protocol.

A family protocol not only protects the economic purpose of the business, but also safeguards its continuity from generation to generation while preserving family harmony.

In addition to the matters usually covered by shareholders’ agreements, a family protocol may establish the values and principles governing the company, rules on gifts or donations, the matrimonial property regimes of family shareholders, succession planning, and the conditions under which family members may work in the business, among other aspects.

This means that, in addition to being coordinated with the articles of association, the family protocol must also be aligned with prenuptial or postnuptial agreements, wills and succession arrangements, while respecting the rules applicable to each institution.

A family protocol may also create specific family governance bodies, such as:

• The Family Business Assembly, where family members with an interest in the business — whether or not they are shareholders or employees — meet periodically to foster family unity, understand the company’s strategy and feel heard, thereby strengthening their sense of belonging.

• The Family Council, a smaller body appointed by the Assembly, whose role is to ensure the harmonious evolution of both the family and the business and which, unlike the Assembly, operates on a continuous basis throughout the year.

Types of Family Protocols

Depending on their content, three types of family protocols can be distinguished:

• Corporate or third-party enforceable protocols: where the protocol, or part of it, is incorporated into the articles of association, making it binding on the company and enforceable against third parties.

• Contractual protocols: the most common type, which are legally binding between the parties and may be enforced before the courts.

• Moral or “gentlemen’s agreements”: ethical in nature and therefore not creating legally enforceable rights or obligations.

Are Shareholders’ Agreements and Family Protocols Mandatory?

No. The law does not require them, and both their adoption and their disclosure are entirely voluntary. However, based on our professional experience, they are highly advisable.

In many companies — particularly family businesses — these issues are avoided for years and tend to erupt at the most delicate moments, when it is often already too late: generational transitions, the appearance of spouses or former spouses with interests unrelated to the business, conflicts between different family branches, disputes between siblings over control, or family members working in the company without adequate preparation.

The drafting of such agreements allows these situations to be anticipated, expectations to be organised and dialogue between shareholders to be encouraged. In this context, having an external adviser who can provide an objective perspective outside the family or business nucleus is, in our view, essential. For this reason, the best time to put these instruments in place is at the incorporation of the company, or even earlier, so that the articles of association can be aligned with them.

Common Features of Shareholders’ Agreements and Family Protocols

• Both are parasocial agreements, entered into outside the company, and may be signed by all shareholders (so-called unanimous or omnibus agreements) or only by some of them. They may also provide for the accession of future shareholders or, in the case of family protocols, future generations, thereby ensuring intergenerational effectiveness.
• They may not contravene the law or the articles of association and are binding only on the parties who sign them.
• For them to be enforceable against the company itself, it is necessary for the company to become a party to the agreement and for the relevant provisions to be incorporated into the articles of association, for example as ancillary obligations.

Properly drafted, these agreements are not merely documents, but strategic tools that protect the future of the business, organise relationships between its members and prevent conflicts that may jeopardise its continuity and, in the case of family businesses, the family’s assets. They are intended to be living documents, capable of adapting to the reality of the business, and therefore require ongoing monitoring and periodic review.

At Navarro Llima Abogados, we understand that every family and every business is unique. That is why we accompany our clients throughout the entire process, from analysing the family and corporate structure, through negotiation, drafting and implementation, to the ongoing review of these instruments.