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Start-Ups I: The Shareholders’ Agreement, the Key to Successful Organization 

by Garrigues Corporate/Commercial Department

Published: February, 2014

Submission: March, 2014


We are seeing a definite upswing in the number of entrepreneurs and start-ups for myriad reasons (including, as one example, the recent enactment of Law 14/2013, of September 27, 2013, to support entrepreneurs and their internationalization). As a result, we have decided to launch a series of posts on the subject of start-ups and the world of the entrepreneur. This first post discusses the shareholders’ agreement because from a legal angle it is one of the cornerstones of any start-up. Clear operating rules for the shareholders play a vital role in avoiding future disputes that could put a damper on the start-up project.

Shareholders’ agreements are simply that: agreements; concluded between the shareholders to regulate their internal relations and to govern the various elements related to the operation of the company. They are the most commonly used and recommended way to accomplish this, given that the corporate legislation is rather rigid and does not cover every component of a business. Shareholders’ agreements allow the shareholders to add to, further specify or expand the provisions in the bylaws and to deal with business matters that fall outside the scope of the legislation.


Nature and Effect

The shareholders’ agreement is an inter partes agreement, meaning it is only effective and enforceable between the contracting parties. These parties acquire certain obligations and, in the event of a breach, the relevant remedies for breach of contract (e.g. damages or specific performance) will come into play.

Consequently, shareholders’ agreements are not enforceable against all comers (erga omnes). This is made explicit in article 29 of the Corporate Enterprises Law, which states that agreements reserved between the shareholders will not be enforceable against the company or third parties.

The existence and reason for shareholders’ agreements can be found in the principle of freedom of contract, regulated in both article 1255 of the civil code and in article 28 of the Corporate Enterprises Law. Both of these pieces of legislation place a restriction on this principle, however, preventing the parties from including these agreements matters that are contrary to the law.



A range of matters can be regulated by way of a shareholders’ agreement based on the principle of freedom of contract. The most significant are:

- Good governance at the company. The key to achieving the smooth operation of a company is to have in place governance and organizational rules that will enable the shareholders to resolve disputes and deadlock. Given the importance of this last point, one of our future posts will be on this subject.

Good governance at a company consists of establishing principles and rules of conduct for the organization of the company. Specifically, they should deal with the most important bodies of the company: the shareholders’ meeting and the board of directors.

It is recommendable to provide certain rules on the shareholders’ meeting, such as requiring qualified majorities for certain suitably identified decisions (for example, decisions to amend the bylaws or to appoint or remove directors).

On the board of directors, the shareholders’ agreement should set out matters such as how the shareholders will be proportionally represented on the board, who will hold the offices of chairman and secretary, and how board meetings will be called and held.

- Entry of shareholders. This is a fundamental consideration for start-ups in the context of potential future investors. The entry of investors (generally) entails new circumstances at the company that need to be regulated. The shareholders’ agreement should therefore set out the terms and conditions under which the investment in question will be made.

Investors will enter and join the company in different ways determined by their profiles. The conditions imposed by business angels will not be the same as those laid down by more sophisticated investors such as private equity or venture capital firms. We will look at these and other types of financing in a later post.

- Exit of shareholders. Given the nature of a shareholders’ agreement (as an ongoing agreement), it must deal with the potential exit of shareholders and set out the alternative ways in which their exit can take place. We have several available mechanisms, such as temporary prohibitions on selling shares, preemptive rights of acquisition, tag-along and drag-along rights, rights of withdrawal and the provision of options, to name a few.


As we have seen, the key to the smooth operation of a company and untroubled relations between its shareholders hinges on the existence of a shareholders’ agreement. With a shareholders’ agreement, the parties will know from the outset the rules that govern their relations, as well as the rights they have and obligations they must perform. The proverb said it best: “Don’t put off until tomorrow what you can do today.”


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