Do you know the difference– and which is appropriate for your company?
When establishing a corporation in Spain, the terms “Shareholders’ Agreement” and “Articles of Association” are often thrown around.
In reality, they are appropriate in different situations, and aren’t always mutually exclusive.
One of the main constitutional documents of Spanish law requires that companies have Articles of Association (Corporate Bylaws). These articles specify the regulations for a company’s operations and define the company’s purpose.
In addition to the Articles of Association, the company’s shareholders may also choose to enter into a Shareholders’ Agreement. This agreement stipulates the shareholders’ rights and obligations.
With this in mind, the following information analises the main differences between the Articles of Association and Shareholders’ Agreements. Additionally, the article considers their suitability to meet your specific business requirements. Finally, we will provide information about the legal consequences of potential conflicts between the two to keep in mind.
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Definition and differences between Articles of Association and Shareholders’ Agreements
What are the Articles of Association?
The Articles of Association act as a binding contract between all present and future shareholders of the company. It also acts as a binding contract between the shareholders and the company itself. You can file them at a competent Commercial Registry when the company is first established.
In summary, Articles of Association govern the internal organization of a company. They must include, among other matters, the corporate purpose, share capital, and organization of the company’s governing body.
The Spanish Law on Corporations also allows for the regulation of other aspects in the Articles of Association. Examples of this are regulation on the existence of shares with voting, dividend distribution privileges, and the specific restrictions or conditions on share transferability.
What are the Shareholders’ Agreements?
All Spanish companies are legally required to have Articles of Association. However, Shareholders’ Agreements are optional legal instruments that supplement the Articles of Association.
They consist of a private agreement, regulated by the General Principle of Contractual Freedom (art. 1255 of the Spanish Civil Code). All or part of the company’s shareholders may agree upon a Shareholder’s Agreement, if they consider it appropriate.
The Spanish law does generally not require any specific formalities for the validity and enforceability of Shareholders’ Agreements. Despite that, there are some particular cases where the government requires notarization. One such example is when the Shareholders’ Agreement deals with real estate contributions or intellectual property rights transfers because it requires the formality of a Public Deed.
As a consequence of its legal nature as a private agreement, the effectiveness of a Shareholders’ Agreement is (unlike the Articles of Association) limited to the parties that have executed the agreement. Thus, it is generally not enforceable against the company or third parties. The legal standard for this comes from Art. 29 of the Spanish Law on Corporations.
By way of an example, let’s say an agreement obliges a shareholder to vote in a certain way at a General Meeting. The shareholder in question fails to comply with the vote. In this case, the validity of the decision reached at the General Meeting cannot be challenged on the basis of a breach of the shareholder’s obligation under the Shareholders’ Agreement.
However, a breach of this agreement can offer protection. For example, it will generally entitle the injured contractual party to claim damages from a defaulting shareholder. Want to know more about this agreement? Read our post.
Conflicts between the Articles of Association and Shareholders’ Agreements: which prevails?
In the event of a discrepancy between the Articles of Association and a Shareholders’ Agreement, the former normally prevails (according to Spanish jurisprudence). Interestingly however, Spanish courts have, in certain cases, recognized the priority of Shareholders’ Agreements. This has been the case at times when all the company’s shareholders signed the Shareholders’ Agreements unanimously and when their compliance is necessary to safeguard the “principle of good faith.”
Why this matters and the reasons to draft a shareholders’ agreement
Given the general priority of Articles of Association over Shareholders’ Agreements, the experts at Lexidy usually advise our clients to include as much of the desired content as possible in the Articles of Association. They can be drafted according to the specific needs and requirements on a case-by-case basis. Of course, they must remain in compliance with the necessary provisions of Spanish corporate law.
Keep in mind that a business project may require the regulation of matters that cannot be included in the Articles of Associations. Agreements between shareholders regarding certain share transfer mechanisms, voting mechanisms, exit routes, deadlock mechanisms, and other situations may fall into this category.
Additionally, the shareholders may wish to keep some of their agreements private and confidential. Thinking back to our above example, agreements to vote in a certain way might fall under this category. In all of these cases, it may be a good idea to draw up a Shareholders’ Agreement.
In case you plan to draw up a Shareholders’ Agreement, it is of crucial importance to ensure two points. It must have Consistency and Compatibility with your Articles of Association. Our Corporate team can assist with drafting, reviewing, amending, and advising on the provisions of both a company’s Articles of Association and Shareholders’ Agreements.
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