02 Nov Bylaws vs. Shareholder agreements

Companies need some rules that govern the operation of the same:  from the company purpose or the share capital to the way to choose the administrators or those referred to the decision making process in General Assembly. The classic rule which has the purpose of fulfill these needs is the “bylaws”. Such affirmation does not mean that this bylaws is the only rule which regulate the operations of a company. Nowadays, an other types of agreements are gaining strength, the so-called “shareholder agreements”.

In this post we will analyze some of their differences, and how we shall adapt it to the business requirement and to the needs of each partner, among which could exist important discrepancies.  All of this generates a serie of concerns that are necessary to treat and to solve.

Is it mandatory to have both the bylaws and the shareholder agreements?

The first question which we should keep in mind is if it is mandatory the fact of having bylaws and shareholder agreements. In both cases the answer is different: whereas  the bylaws are mandatory, shareholder agreements are not, which means that each company must have its own bylaws. Moreover, it is not only an obligation but also it is one of the requirement to grant the constitutional deed and its subsequent registration in the Mercantile Registry. The shareholder agreements are not mandatory, what means that it’s only an optional legal instrument, which could agree the partners if they consider it as appropriate.

The shareholders agreements are only binding for the parties who sign the contract, what means that they are private agreements , which are not registered in he Mercantile Registry, and whose purpose consist on complet, improve or develop some issues or relations between the parties, which are not allowed to be included in the bylaws (or whose incorporation dont result  appropriate for some partners interest).

Here appears the second question which we shall keep in mind,

Why do not be included those shareholder agreements in the bylaws?

The main reason is the fact of that the issues/facts which can be included in the statutes are limited.

That is, the shareholders have not completely freedom to include in the statutes whatever they want. The Mercantile Registry accept only certain content, and apply strict criteria in order to evaluate which facts are allowed to be registered. Therefore all these issues which are not allowed to be included in the statutes could be regulated by the shareholders agreements, which are more flexible and can suit better to the shareholders´ will.  They could be modified more quickly, or even the shareholder can sign more than one if he consider it as appropriate.

Do the shareholders agreements have less force than the bylaws? Are less enforceable?

Only in the case, wherein the company disrespect a shareholder agreement. That is, the affected partner could not claim against the aforementioned company. In other words, theoretically the company complies with the law respecting what is included in the social statutes. Nevertheless, this issue does not mean that “this breach of the contract (the shareholder agreement) does not remain simply on damp paper. Against this background the”harmed partner” shall not claim against the company but against the other partner with whom he signed the agreement. The shareholder agreements shall be considered a contract what means that have force of law (are binding between the parties which sign it). Their only limit is the law (they do not establish obligations against the law)

What clauses are typical of the shareholder agreements?

In recent times, this type of agreement between the partners has gained momentum among start-ups which are looking for investors who are willing to invest in interesting and innovative projects in change for shares of the company (the number of partners can increase in a short period of time).  Nevertheless, the shareholder agreements may be adopted any time and regardless of the.shareholder structure. One of the most common causes are the situation, wherein an unexpected event occurred. ,making disagreements between the partners which only can be regulated/included in the shareholder agreements. In all these cases, the sign of shareholder agreements is also recommended.

What is the most usual content which is included in the shareholder agreements?

(i) Permanence of founding Partners. When the founding partners decide to sell part of their participation of the company it is usually common that the new partners want to agree a clause of minimum permanence period for the founding partners until they can learn the “know how” of the company.

(ii) Limitation the administrator powers. The partners may agree certain actions limitations (usually in relation with amount and type of action).

(iii) Minimum price for the shares sale, what will mean that none of the signatory partners can sell below the agreed price to any third or another partner.

(iv) Tag-Along clause. In the event that one of the partner receive a purchase offer of their shares (not the company), and this buy entail a control change in the company, the rest of the partners have the right to request that their shares will be also buyed by the third at the same price and conditions.

(v) Drag- Along clause, whose purpose is to avoid blocking situation: when the majority partner receives a purchase offer of the whole shares of the company and the minority partners do not agree with this offer, the majority partner has the right to “drag” the others partners, who will be obligated to sell their shares .

(vi) No-competition and exclusivity clause between entrepreneurs, investors and/or workers. The purpose of this clause is to avoid  prevent potential competitors

However, as we above mentioned , the shareholder agreements can include a great variety of agreements, depending on the needs of the partners. There is not a unique or standard model. Each one shall be adopted in relation with t (i) the currently situation  of every company and (ii) the needs of the partners.

At Navarro Llima Lawyers we have experience in relationships and conflicts between partners, so do not hesitate to contact us if you want more information.

Héctor González

Lawyer