Shareholders’ agreements from an investor’s perspective: guarantees for a secure business environment

Shareholders’ agreements from an investor’s perspective: guarantees for a secure business environment

In the business world, analysed globally, shareholders’ agreements are, generally speaking, an axis on which the relations between the shareholders, and between the shareholders and the company are sustained and articulated beyond what the articles of association may provide, which, as is well known, are certainly limited by law in certain matters which are answered and resolved with shareholders’ agreements.

However, if we use the deductive method and go down from the general to the particular, in the world of start-ups under Law 28/2022, of 21 December, on the promotion of the start-up ecosystem and, in general, of start-ups, of which this Firm is a perfect connoisseur and expert in everything that concerns its ecosystem, this type of private contract between the parties, which is its true nature, begins to take on real importance if we adopt the investor’s perspective.

As is logical, the parties to a contract do not necessarily want exactly the same thing; on the contrary, it is usually conflicting interests that converge in a kind of clauses that articulate a relationship in which all parties gain and lose something, but always with the horizon of their own benefit in positive balance with that which is renounced, even in this special and specific type of contract in which all the parties involved, from the outset, want the same thing; the good progress of the company in order to obtain benefits through this vehicle.

However, not all possible situations benefit all partners equally or in the same way, what for some may represent an idyllic situation, for others may not be so idyllic. Therefore, in this brief post we will briefly analyse some of the most important aspects to be taken into account when the aim is to protect the investor in the shareholders’ agreement.

Nature of the shareholders’ agreement

As has been said, the shareholders’ agreement is a contract and, as such, its nature is contractual, voluntary, private and has the force of law between the contracting parties. However, it is not enforceable against third parties.

In this sense, it is interesting to convert it into a public document in order to obtain the status of enforceable title granted by Law 1/2000, of 7 January, on Civil Proceedings and thus, in the event of non-compliance, to enjoy the procedural guarantees that this type of document enjoys.

Protection of the investment

When it comes to defending the investment made, it will be interesting to include clauses in the agreement to protect against the possible conflicting interests of the founding shareholders, such as: the right to appoint members of the management body or to be able to send “observers” to the meetings of the body; periodic mechanisms that duly guarantee the shareholders’ right to information; enhanced majorities on certain issues and matters reserved for voting by the investment shareholders; restrictions on the free transfer of holdings (or shares where applicable) in order to prevent the “flight” of the founders; non-competition and exclusivity; compulsory purchase or sale rights; as well as the right of pre-emptive acquisition, follow-on and discounts.

Veto rights

The inclusion of a veto right is a good solution to control certain strategic issues, such as the election of directors; approval of certain budget items; new share issues, or any other issues which, due to the nature of the company concerned, are relevant to protect the investment made.

In this way, investors ensure that they have the necessary influence on the decisions taken and that they cannot be taken without their consent.

Drag-along and tag-along clauses

These clauses are of particular importance to investors for possible changes of control of the company.

The drag-along clause means that, if an offer is received under certain conditions for the whole company, the partner negotiating the sale can, if certain milestones are met, force the sale on the other partners, thus guaranteeing a return on the investment, since, if the buyer is unable to sell what is required, the latter could end up disinterested.

Likewise, the right to accompany allows minority shareholders to join in the sales of other shareholders on good terms, thus ensuring that they do not remain in a company that has changed hands.

Exit and liquidity events

Consideration needs to be given to how to deal with exits and the occurrence of liquidity events when they occur. To this end, it is useful to ask certain questions in order to obtain and formulate the answers that offer the best solutions to some of these questions: What happens if the company is sold; how will profits be distributed among the shareholders; how can investors be guaranteed effective participation in these transactions and exercise their pre-emptive rights; and how can investors be guaranteed effective participation in these transactions and exercise their pre-emptive rights?

Non-competition clauses

These clauses are intended to ensure that the founders and other key (qualifying) partners of the company do not compete directly in the same market for a certain period of time after their exit.

Conflict resolution

Finally, clauses can be included to provide for dispute resolution mechanisms, such as subsuming to a specific court of law or the appointment of arbitrators, the need to submit the dispute to mediation, etc.

These are some of the most relevant issues to be addressed in a shareholders’ agreement, but, as is logical, in an article as summarised as this one, it is impossible to bring together all the information necessary for the drafting of a shareholders’ agreement that is effective in any of the cases that may arise; it will have to be qualified professionals and the maximum of experience who carry out this task if the result is to be guaranteed to the maximum extent possible.

At Letslaw by RSM, we specialize in corporate law, and our team of commercial lawyers would be delighted to advise and support you with any corporate or commercial inquiries. Get to know us and contact us at the following link.