THE EFFICACY OF SHAREHOLDERS’ AGREEMENTS

The rules by which shareholders of a corporation unanimously agree to be governed are the Bylaws, also known as Articles of Association.

The Bylaws set (i) the organization of Company and (ii) the relationship between it and partners. They must have a minimum content under Article 23 LSC, which includes the identification of the company, contributions, company bodies and the rights and obligations of the partners regarding the Company. In addition, the Bylaws may contain covenants that partners wish as long as they do not contravene the law, morality, public order, or the basic principles of company type that has been chosen. The Bylaws have a dual nature: they are rule and contract at a time.

As is known, the corporation (Sociedad Anónima) is the quintessential capitalist Company, so that the capitalist element prevails over the personal one. In other words, an investment is more important than the investor. Therefore, shares are essentially transferable. However, although it is also a capitalist Company, in the limited partnership (Sociedad Limitada) the person is more important than investment. Therefore, the transfer of shares is subject to restrictions. Members have preemptive rights, and the transmission is subject to the consent of Company. Therefore, the articles of a corporation may not contain covenants that severely limit the transferability of shares.

The Bylaws are entered in the Commercial Register for the purpose of publicity, and therefore do not only oblige the founders of the Company, but also any future partner, who is supposed to know them, because they are public, and therefore is legally presumed that by assuming the status of partner, the new partner is obliged to comply with the Bylaws.

However, sometimes partners wish to celebrate all together, or only some of them, some covenants relating to the property or the government of Company. These pacts might  reside outside of the corporate Bylaws system,  because only some partners have concluded them, or because its inclusion in the Bylaws violates the basic principles of each company type. According to a classification largely accepted by the scholarship, shareholder agreements can be of three types: (a) relationship, if they affect the relationship between partners, not affecting the Company (for example, a promise of sale of shares granted by one partner for another, a commitment to a partner over another in the sense of guaranteeing an interest in their shares), (b) attribution, if the partners agree to favor the Company (for example, to underwrite a capital increase under certain circumstances) and (c) organization, which are the most important since they regulate the run of the governing bodies of the Company, through the obligation of the partners to vote in a certain way (for example, to distribute the benefits of exercise instead of assigning them to voluntary reserves).

An example of a shareholders’ agreement expressly recognized by positive law is the family shareholders agreement, which generally is used to govern a family business and the rules of succession in ownership and management.

Shareholder agreements do not belong to Company Law, but to Contract Law. Therefore, its enforcement should be conducted through the general rules of obligations of the Civil Code. It is imposible to utilize the Corporate mechanisms to contest the resolutions adopted at Board, infringing a Shareholders Agreement, since in accordance with Article 29 of the Capital Companies Act, the covenants which remain reserved between the partners (ie, the shareholders agreement) will not be enforceable against Company. Instead, they should be conducted through a motion for compliance pursuant Article 1098 of the Civil Code. Once obtained the judgment, go to in natura enforcement mechanisms, with the possibility offered by the legal system to complete the will of the Partner by means of judicial declaration.

These provisions make sense in the case of shareholders agreements signed between some of the partners, and in which a third party could even intervene. But the agreements signed by all partners – who are the ones who make up Company – are they really reserved for the Company? Obviously not. Could we say then that an agreement adopted at an all-shareholders meeting, but not entered in the Register, is a covenant reserved to Company? Obviously not. For the same reason, a certain sector of the scholarship asks whether the agreements of all partners (if the subjective element does not change) should not also be effective against Company.

Supporting this argument one could argue that if one of the main purposes of Company Law is to protect the partner against abuses of the majority or the minority, the corporate regime for adopting agreements fulfills that role when a decision is adopted as only a part of the partners. However, when the company agreement is adopted unanimously, the individual consent given by all partners excludes prejudices to the interests of each of them, according to the legal saying “volenti non fit iniura “.

This opinion has been challenged with the argument that the government of corporations, due to the adoption of decisions by majority and the impossibility of separating ad nutum, requires a more demanding procedure for decision-making that the mere will of all partners. In this sense it is reasoned that if the covenants of all partners are tantamount to company agreements, they should be subject to their same limitations (eg not to contravene the basic principles of company type). Moreover, problems can always arise jeopardizing teh effectiveness of an omnilateral shareholder agreement against a Company, for instance,  the should be the same when entering in the agreement and when producin effects. Another problem may be that in the case of legal entities, if a partner is acquired by another third party; and if the third party does not join to the shareholders’ agreement, the pact could not be opposed to the Company, since the needed subjective identity had dissapeared.

The effectiveness of a legal action in corporate and contractual scope, respectively, is very different. A remedy against corporate agreements which breach the Bylawss may be accompanied by some precautionary measures requesting the suspension of the act and its preventive entry in the Commercial Register. In this way, partners can ensure to some extent that the material reality will not change irreversibly. However, action against the defaulting member of a shareholders agreement shall not suspend the execution of the Company decision. An action based in Contractual Law which may take months or even years. Thus,  when the firmness of the judgment occurs and enforcement in natura is requested (forcing the partner to issue the declaration of intent agreed in the shareholder agreement, or the appropriate compensation for the damages suffered ) it is likely that the agreement has produced legal effects hardly revocable, and even the defaulting partner is in a state of insolvency.

From the decision of Tribunal Supremo of February 25, 2015 it seems that the jurisprudential state of affairs – in the absence of other judgments establishing this jurisprudential line – is as follows:

Of course, and according to the wording of Article 29 of the Capital Companies Act, shareholder agreements, even when being signed by all partners, are unenforceable against the Company.

However, neither will be challengeable a corporate agreement, adopted in compliance with a universal or omnilateral shareholder agreement, which contravenes the Bylaws; on the grounds that allowing the challenge to a voluntary agreement in which the appellant had participated contravenes own good faith, estoppel, and would be an abuse of rights.

Finally, within the English-speaking world, which are very frequent Shareholders Agreements especially in relation to start-ups (remember that investors want quick profit, participation in making key decisions, and ease of disinvestment), the case Heard before Court of Appeal in the United Kingdom (case Dear and Griffith v Jackson) follows resembling guidelines: it is declared that no shareholder agreement that contradict the Bylaws, so it establishes the primacy of Bylaws on shareholder agreements.

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