Shareholders' agreement

What a shareholders' agreement is, and what it is not

A shareholders' agreement is a contract between the owners of the company. It governs what the articles of association cannot, or should not, govern: how the important decisions get taken, what happens if someone wants out, what happens if someone stops contributing, and what happens the day two people who understood each other stop doing so.

It does not replace the articles and does not override them. And here is the first thing worth knowing: under article 29 of the Spanish Companies Act, agreements kept private between shareholders cannot be enforced against the company. Translated: an arrangement that lives only in the agreement may bind those who signed it and be worthless against the company itself. That is why the serious work is deciding, clause by clause, what belongs in the agreement and what has to go up into the articles.

Why it is signed while everyone still gets along

A shareholders' agreement is not measured by how well it works while there is goodwill, but by what it resolves once there is none. And there is a practical reason not to leave it for later: adding or amending a ground of expulsion in the articles requires, under article 351, the consent of every shareholder. On the day of the conflict it is already too late.

The clauses that actually decide

A twenty-page agreement can be useless and a six-page one can settle almost everything. These are the ones that matter.

• Reinforced majorities. Which decisions the holder of 51 % cannot take alone: taking on debt, selling essential assets, changing the corporate purpose, distributing or withholding dividends, hiring relatives.
• Drag along and tag along. Drag along lets the majority holder bring the minority into a sale of the whole; tag along lets the minority leave on the same terms. Without the first, a sale collapses; without the second, the minority is left with a buyer they never wanted.
• Commitment and non-compete. What is expected of each of you in time and dedication, for how long, and what happens to their shares if they leave early.
• Exit and valuation. The valuation method is agreed now, not when one wants to sell and the other to buy. Failing agreement, article 353 refers the matter to an expert appointed by the Commercial Registry whose report is binding, and that is slow and expensive.
• Deadlock. What happens when the meeting cannot decide: mediation, a cross put-and-call option or, as a last resort, dissolution.

How long it takes

An agreement for a company with two or three shareholders normally closes in two or three weeks, and the real work is not drafting but conversation: most of the time goes on each side saying out loud what they had been taking for granted. That conversation, uncomfortable now, is exactly the one you will not want to have in three years' time with lawyers across the table.