Protection of minority shareholders in corporate agreements: essential legal keys

Protection of minority shareholders in corporate agreements: essential legal keys

In Spanish limited liability companies (S.L.), shareholder agreements are a key tool to ensure that the interests of all shareholders are protected, especially when there are minority shareholders whose position could be vulnerable in critical business decisions.

In this article, we will explore the main legal clauses that protect minority shareholders and how to apply them correctly to ensure a balanced structure in corporate agreements.

The shareholder agreement: a necessity in corporate governance

In a limited liability company, the articles of association provide a basic framework for the company’s operations. However, shareholder agreements go further, offering customization that not only regulates relationships between shareholders but also sets out mechanisms for decision-making and managing complex situations, such as the entry of new investors or the sale of shares. These agreements are crucial for protecting minority shareholders, who, due to their smaller participation, may be left unprotected in critical situations unless adequate precautions are taken.

In my professional experience, I have had the opportunity to work on several agreements where clauses regulating the protection of minority shareholders have been decisive for the success of the transaction. A well-structured shareholder agreement ensures that minority shareholders do not lose control of their participation or their fundamental rights in strategic decision-making.

Key clauses for protecting minority shareholders

1. Tag Along and Drag Along: protecting minorities in the event of sale

One of the most common clauses in shareholder agreements is the tag along clause. This clause grants minority shareholders the right to join the sale of shares under the same conditions as majority shareholders, allowing them to take advantage of the sale opportunity without losing the chance to liquidate their investment.

On the other hand, the drag along clause establishes that majority shareholders can force minority shareholders to sell their shares if they decide to do so. This clause ensures that a sale is not blocked by a dissenting minority and facilitates the complete sale of the company, which is critical in M&A (mergers and acquisitions) transactions.

For example, in a recent funding round for a fintech company, minority investors were able to benefit from a tag alongwhen the majority shareholders decided to sell their stake to a private equity firm. This clause allowed the minority shareholders to enter the transaction under the same terms, resulting in a satisfactory liquidation for all shareholders.

2. Anti-dilution clause: protecting the value of the stake

Another key clause for minority shareholders is the anti-dilution clause. In financing rounds where new shares are issued at a lower price than previous rounds, this clause ensures that existing shareholders do not lose the value of their original investment. There are different types of anti-dilution clauses, with the most common being full anti-dilution and weighted average anti-dilution.

In a recent case, a client in the biotech sector receiving venture capital investment agreed to an anti-dilution clause to protect the founders’ shares. The weighted average anti-dilution clause allowed them to maintain a proportional stake, even when new investors bought shares at a lower price than the previous round.

3. Enhanced information rights: transparency in management

One of the greatest concerns of minority shareholders is the lack of access to relevant information needed to make informed decisions. While the law only requires a minimum amount of information, shareholder agreements can include clauses that strengthen this right, requiring the company to provide detailed and periodic information on management and strategic decisions.

In a recent agreement with a tech company, a clause was included that gave minority shareholders access to quarterly financial statements, as well as the obligation to report key negotiations and corporate strategy decisions. This measure was essential for the minority shareholders to actively participate in discussions about the company’s future.

4. Veto rights and control over strategic decisions

In some cases, minority shareholders may want to have effective control over certain decisions that affect the company’s direction, even if they do not hold a majority of the shares. For this, veto rights clauses can be included, which give minority shareholders the power to block important decisions, such as the sale of the company, changes to the articles of association, or the issuance of new shares.

For example, in a startup I advised, minority shareholders included a veto right in the shareholder agreement, allowing them to block any transaction involving the sale or merger of the company without their consent. This gave them greater protection in the face of radical changes that could alter the nature of the business.

Additional strategies: SPVs and syndication of shares

In certain complex transactions, such as funding rounds with multiple investors, shareholder agreements can also include the creation of Special Purpose Vehicles (SPVs) or share syndication agreements. These structures allow investors to group together under one entity, streamlining share management and ensuring greater efficiency in decision-making.

In a case with a venture capital fund, investors used an SPV to acquire a stake in an insurtech company. This facilitated the entry of new capital without the need to restructure the company, allowing the minority shareholders to maintain their stake intact.

The key to an effective shareholder agreement

Protecting minority shareholders in a limited liability company is essential to ensuring a balanced relationship and avoiding future conflicts. Clauses such as tag along, drag along, anti-dilution, and information rights are key tools for ensuring that minority shareholders are not disadvantaged by majority shareholders. In addition, veto rights and structures like SPVs and syndication of shares offer additional solutions to manage participation efficiently and protect the interests of all shareholders.

It is crucial that agreements are carefully negotiated and tailored, with the support of specialized lawyers for shareholders’ agreements to ensure that they accurately reflect the interests of all parties while maintaining the balance and transparency necessary for the smooth operation of the company.