The shareholder agreement is a contract under private law in which all or some of the shareholders of a company determine their rights and obligations towards that company and, in particular, the decision-making and investment procedures. A shareholders’ agreement is required for various business transactions and is often part of a participation agreement. In this article, you will find out everything you have to know about shareholder agreements.
What is a shareholder agreement?
A shareholders’ agreement sets out aspects of the shareholders’ relationship with each other concerning matters not normally included in a company’s articles of association. For example, an important part of a shareholders’ agreement is the buy-sell provision, which sets out what happens if one of the shareholders is no longer able to participate in the company’s business due to death, disability, insolvency or some other situation.
The shareholders’ agreement is also used to ensure that shareholders are actively involved in the governance of the company. The agreement may contain provisions requiring a shareholder to be on the board of directors and to be appointed as an officer of the company. If a shareholder does not wish to continue to participate in the operation of the company, the shareholders’ agreement may require that shareholder to also sell its shares back to the company or the remaining shareholders.
Why should you have one?
When you start a business, you find yourself on a rollercoaster ride. Many situations arise that can lead to disagreements and even conflicts between shareholders. This is true even if the shareholders are family members or have known each other for many years.
Establishing your company with a shareholder agreement will help partners avoid conflicts and create a roadmap for resolving them. Under Spanish law, a company is not required to have a shareholders’ agreement. However, we strongly recommend that a shareholders’ agreement is drawn up when the company is incorporated or when new shareholders join the company.
Advantages of Shareholder Agreements
Although the structure of each agreement differs for different companies, the agreement is responsible for structuring the relationship between shareholders. The advantages of shareholder agreements are discussed in more detail below:
Most shareholder agreements are drawn up in accordance with the articles of association and certificate of incorporation of the company. Thus, these agreements not only establish the shareholder structure and rules but also define the basic management of the company, the board of directors and its activities.
This represents an additional provision that the organisation can rely on. Unlike the articles of association, these agreements are confidential and not available to creditors or non-members. Therefore, they also ensure that your company’s private information remains confidential.
Well-drafted shareholder agreements offer shareholders the best way to resolve disputes. By seeking the advice of an experienced lawyer when drafting shareholder agreements, you can develop an effective dispute resolution strategy specific to your company.
These agreements regulate the relationships between the various shareholders and establish rules for investors to enter or leave the company. This makes changes in corporate governance more flexible and helps avoid unnecessary litigation. Various clauses, such as a non-competition clause for the exiting shareholder or dividend distribution provisions, can be included in the agreement to allow the company to adapt to future needs.
Consistency between the majority and minority shareholders
This is one of the most important benefits of shareholder agreements. These agreements help maintain consistency between the majority and minority shareholders of your company. They also ensure that majority shareholders do not abuse their power by setting out key issues in the agreement that require unanimous shareholder support.
Restriction on transfer
Shareholder agreements may also contain a share purchase agreement or a sale and purchase agreement to restrict the transfer of shares between key members of the organisation. Shareholder agreements impose a number of important conditions, such as obtaining loans and electing directors for your company. Failure to comply with these conditions can lead to serious litigation for your company.
Elements of Shareholder Agreements
The contracting parties are free to define the content of the agreement. In principle, however, the contract must not violate mandatory legal provisions, public order, morality or the right of personality. Its contents are usually a combination of:
- agreements under the law of obligations, such as rights of first refusal and purchase rights, and
- agreements under company law such as voting rights.
Furthermore, the contract must contain mandatory provisions on the duration of validity and a termination clause.
The basis of a shareholders’ agreement usually consists of the following elements:
- Contracting party. A complete listing of all contractual partners such as the previous shareholders, the managers of the company and the new shareholders joining the company.
- Basis of contract.
- Duration of contract. As a rule, a shareholders’ agreement requires a long-term commitment of the parties in order to achieve the contractual purpose. When determining the duration of the contract, care should be taken not to bind the parties for an excessively long period of time.
- Penal provisions in the event of a breach of contract;
- Succession in the event of death;
- Place of jurisdiction;
- Severability clause;
Optionally, most contracting parties opt for these supplementary contents:
- Voting clauses. In order to safeguard the control function of the new investors, all other shareholders undertake to vote against motions at the general meeting which have not been approved in advance by the new investors.
- Responsible persons and responsibilities on the board of directors.
- Divestiture provisions and price determination mechanisms;
- Fiduciary duties and competition clauses;
- Obligations to make additional contributions;
- Regulations on employee participation, especially in the case of succession arrangements;
- Standstill clauses;
- Obligation to bind the company over the entry of additional shareholders.
A shareholders’ agreement is not obligatory but appears to make sense for most small and medium enterprises. It offers the opportunity to create clear structures and rules for the shareholders. It can also reduce or completely avoid ambiguities and disputes. Since a shareholders’ agreement is not subject to any legal structures, it gives the parties a lot of creative freedom. On the other hand, the crux of the matter is that the drafting is very complex. Consultation with a specialist lawyer can be strong support. We at GM Tax Consultancy are happy to help you find a lawyer who fits your individual concerns.
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