23 Oct What Problems Can a Shareholders’ Agreement Prevent in Spain?
A shareholders’ agreement makes it possible to anticipate problems that, if left unregulated, can affect the way a company operates. In our previous post on shareholder disputes, we explained how the lack of clear rules makes disagreements harder to resolve once they have arisen.
When a company is incorporated, its shareholders usually have the same objectives and a common vision of the business. But circumstances can change. For example, one may want to reinvest the profits while another prefers to distribute them, or one may take on more responsibility while the other gradually scales back their involvement. These situations do not necessarily mean that the relationship between the shareholders has broken down, but a problem does arise when they have to be resolved without having agreed beforehand how to do so.
What can a shareholders’ agreement cover?
Roles, time commitment and remuneration
In many companies, shareholders do not merely contribute capital; they also work in the business. Consider two shareholders who set up a company on a 50/50 basis and who, during the first few years, work in it on similar terms. Over time, one takes on most of the responsibilities and the other scales back their involvement, yet both retain the same stake in the share capital.
Without rules agreed in advance, disagreements may arise over remuneration, profit distribution or management decisions.
To prevent this, the shareholders’ agreement can set out each shareholder’s role and level of commitment, distinguish between remuneration for work and dividends, and establish criteria for distributing or reinvesting profits. It can also provide for the consequences of failing to honour the commitments undertaken.
This prevents a disagreement over workload from turning into a dispute over ownership or control of the company.
Deadlock mechanisms: when the shareholders cannot agree
Again, consider a company with two shareholders, each holding 50%. One believes the time has come to reinvest the profits and expand the business, while the other would rather distribute them. If, after several meetings, neither will give way and the disagreement spills over into other important decisions, the company may become paralysed.
To anticipate such situations, the agreement can specify which decisions require specific approval, such as certain investments, the admission of new shareholders or the sale of essential assets.
It can also lay down a procedure for resolving the disagreement: meetings within a set period, mediation or even the involvement of an independent expert.
If the deadlock persists, provision can be made for mechanisms to buy or sell shares, or for some other solution that allows the business to carry on.
These clauses must specify how the procedure is triggered, since it is not enough to state that the shareholders will negotiate in good faith. They must also set out which time limits apply and what happens if no agreement is reached. It is also important to avoid making too many decisions subject to unanimity, as what is initially intended as a safeguard can become an obstacle to the ordinary management of the company.
Shareholder exit: what happens when someone wants to leave the venture
The departure of a founding shareholder can affect the continuity of the business, particularly if they perform a role that is difficult to replace. In addition to arranging their succession, a decision will have to be made on what happens to their shares.
Good leaver and bad leaver clauses make it possible to distinguish between the reasons for leaving and to attach different consequences to each. A good leaver would be someone who leaves the venture for a reason that the agreement regards as justified. A bad leaver might be someone who leaves in breach of a lock-in commitment or of some other defined condition.
These categories must be defined in the agreement itself, as Spanish law does not provide a single regime that applies automatically to every company.
The agreement can determine who may acquire the shares, how their price will be calculated, what happens if there is disagreement over the valuation and within what time frame the transfer must take place.
Planning for an exit before it happens reduces uncertainty and helps the company keep running even if its shareholder base changes. You can find out more about these mechanisms in our article.
Share transfers: who can join the company
Sometimes the problem lies in who can join the company. For example, a shareholder may receive an offer for their shares and wish to sell them to a third party, while the others would prefer to keep a competitor out or to have the opportunity to buy the shares themselves.
The agreement can govern these situations through pre-emption rights and other undertakings relating to transfers.
A buyer may also come forward wishing to acquire the entire company, while one of the shareholders does not want to sell. In such cases, two mechanisms can prove useful:
- Tag-along right. This allows a shareholder to join in another shareholder’s sale and transfer their shares to the buyer.
- Drag-along right. This makes it possible to require the other shareholders to sell their shares as well, so that a joint sale can go ahead.
For these mechanisms to work, the conditions for exercising them, the required thresholds, the price and the time limits must all be defined. Precise drafting helps to prevent an individual transfer from jeopardising a significant transaction or leaving a shareholder in a situation they had not foreseen.
Shareholders’ agreements and articles of association: why they must be aligned
Under Spanish company law, signing a shareholders’ agreement does not mean that all of its clauses are automatically enforceable against the company. Article 29 of the Spanish Companies Act (Ley de Sociedades de Capital) provides that agreements kept private between the shareholders cannot be enforced against the company.
For this reason, a distinction must be drawn between the obligations undertaken by the signatories to the agreement and the rules that should also be incorporated into the articles of association, where appropriate for the intended effect. Reviewing both documents together helps to avoid inconsistencies and to ensure that the clauses serve their intended purpose.
In our post on shareholders’ agreements and articles of association, we explain their relationship in more detail.
Advice tailored to each company
There is no single model of shareholders’ agreement that suits every company. The needs of a company with two founders holding 50% each are different from those of a family business or a company bringing in investors.
Before drafting one, it is advisable to analyse how the company is organised, what each shareholder expects and which decisions could cause difficulties in the future.
At Navarro Llima Abogados, we have more than 20 years’ experience advising companies on how to organise their corporate relationships and on preventing and resolving shareholder disputes. If you need to review an existing agreement or put these rules in place for your company, please contact us at info@navarrollimaabogados.com.
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