Shareholder's agreement & Joint Ventures

Question 1

What are shareholder agreements and Joint Venture contracts?

Answer 1

They are legally binding instruments used by the participants in a business with the purpose of regulating and organizing their respective interest in such business.

They are entered when there is more than one party involved in the business and therefore there is the need to set out the terms of each party’s participation in the same.

Mechanism to avoid future conflicts by anticipating them and regulate very clearly each party’s rights and obligations and the consequences of their breach.

Question 2

Why are articles of association alone are not enough to provide the participants in the business the regulation of their interests?

Answer 2

Not enough becasue they have to be in conformance with corporate law.

SHA and JVC may contain provisions that go further or include specific provisions that may differ from such regulation.

Question 3

Relationship between articles of association and SHA or JVC

Answer 3

In case of contradiction betweent the contents, the resolutions passed by the company’s corresponding governing body will be valid and enforceable.

However, if the passing of any resolution in conformity with the AofA implies a breach of any provision of the SHA or JVC, the breaching party will be liable to the other party/ies in the terms set out in hte latter document, so long as such provision does not contravene imperative law, morality or public order.

Question 4

When is the suscription of SHA or JV advisable? (4)

Answer 4

1. When the parties do not have the necessary majority to amend the articles of association in order to include the agreement between them.
2. When they prefer to have agreement between themselves and not with the remaining shareholders
3. When they want the contents of the SHA or JVC to be private or want to provide with a flexible instrument for which the amendment no special formalities need to be complied with.
4. When parties want to regulate atters that exceed the scope of the articles of association.

Question 5

What are the limitations of JVC or SHA?

Answer 5

Not contravene imperative law, morality or public order.

Question 6

What areShareholder agreements?

Answer 6

Agreements that regulate the relations among their suscribers in their quality of shareholders of a certain company

Question 7

What is the purpose of SHA?

Answer 7

1. To complete, concrete or modify their internal relations
2. To influence in a stable and permanent matter in the decision making process of the company. (Political influence in the formation of the social will).

Question 8

What decisions are normally covered by the SHAs? (4)

Answer 8

1. Management of the company
2. Protection against unwanted transfer of shares
3. Distribution of dividends, approval of budged and annual accounts
4. To stimulate production through the granting of incentives to management/employees.

Question 9

What are the types of SHAs?

Answer 9

1. Relation agreements–> regulate the relations of the shareholders without the participation of the company
2. Attribution agreements–> its purpose is to confer advantages for the benefit of the company itself
3. Organization agreements–> regulate the organization, the functioning and the decision-making process within the company.

Question 10

Effectiveness of SHA

Answer 10

SHA are valid according to the principle of autonomy of will stated in section 1255 of the Spanish Civil Code.

Consequences of the breach of a provision of the SHA–> it will entitle the non breaching party/ies to claim the damages suffered as consequence of the breach.

When claiming damages, it will be difficult to provide evidence of the relation of casue and effect between breach and damages and its quantification.

Penalty clauses are usually established to avoid those difficulties. They include

1. Paying fixed amount
2. Trigger a call option

Question 11

What are the contents of SHA? (6)

Answer 11

1. Contribution of the parties
2. Reinforced majorities/corporate control
3. Restriction to the transferability of shares/rights to leave
4. Dead-locks
5. Price of shares in case of transfer and valuation methods
6. Allocation of profits/losses

Question 12

What does the contributions of the parties include?

Answer 12

1. Initial contributions: provisions that regulate the contributions of each party in order to furnish the SPV with the necessary material and human resources for the attainment of the purpose of the business.
2. Additional contributions: mechanisms for future contributions of the parties in order to secure future financing necessitities.
3. Reps and warranties: parties must give R&W regarding the reality and adequacy of their respective contributions.

Question 13

What are reinforced majorities/corporate control?

Answer 13

SHA is an appropriate form to establish reinforced majorities for the passing of resolutions by the company’s governing bodies regarding that the participants in business estimate of great importance but can not be included in the articles of incorporation or want to be regulated by a private document.

Examples:

1. Appointent and/or dismissal of member of the Board of Directors
2. Amendments to the bylaws
3. Issue of debentures (in S.A.)
4. Distribution of reserves
5. Appointment of auditors
6. Mergers, split-off, transformation and dissolution
7. Contribution of assets
8. Distribution of dividends over certain threshold
9. Treasure Stock

Question 14

How can SHA help regulate the Board of Directors?

Answer 14

1. Creation of committees within the board
2. Creation or modification of the business strategic plan
3. Acquisitions, incorporations, or winding up of subsidiary companies.
4. Assumption of debts
5. Grant of guarantees in favour of third parties
   Note: In case of conflict, the benefitf for the company must prevail over the benefits of its shareholders (duty of loyalty).
6. Establish a procedure to determine the sense of the votes of the the company in the General Shareholders Agreement of a subsidiary.

Question 15

What are the restrictions to the transferability of shares/rights to leave?

Answer 15

They are the regime for the transfer of shares in the company operating in the common business.

Regulates:

1. The circumstances under which each one of them will have the capacity to transfer the shares
2. The procedure to be followed for the transfer

Question 16

What are some examples of clauses in the SHA regarding the transferability of shares?

Answer 16

1. Adhesion clauses: the acquirer will have to adhere and be bound by the terms of the SHA.
2. Stand Still/ Lock-up: provide a period of time during which the parties will not be allowed to transfer their shares in the company.
3. Rights of first refusal: confers preferential rights acquisition
4. Need of previous authorization for the transmission.
5. Prohibition of transmission to competitors.
6. Tag along: minority shareholders have the right to sell their shares to the same acquirer and under same terms when majority shareholder intends to transfer its stakes in the company.
7. Drag along: majority shareholder will have right to compel the minority shareholder to sell their shares to the same acquirer and under the same terms.
8. Good leaver/bad leaver clauses (in MBO and/or): regulate the regime applicable to the divestment by a party to the SHA of its stake in the company.

Question 17

What are dead-locks?

Answer 17

Procedure to solve dead-locks to avoid the disolution when parties in equilibrium cannot reach a decision.

Procedures:

1. Criteria of one party prevails over the criteria of the other
2. Initiation of the process for the sale of the company
3. Granting reciprocal options to purchase shares from/to sale the shares to other party (put/call options).

Question 18

How do SHA determine the price of the shares in case of transfer and valuation methods?

Answer 18

The applicable method will depend on the circumstances.

Methods:

1. reasonable value of the shares
2. real value of the shares
   * *Impotant to determine real value which could be based in:
   - Cashflow
   - Ebitda
   - Fair price according to RD 1066/2007
3. market value
4. Price establishe in the General Shareholder Meeting
5. Russian roulette: one party sets the price and the other decides
6. Shot-gun buy sell: same as russian roulette with difference that initial can be increased.

Question 19

How do SHA allocate profits/losses?

Answer 19

Depending on the interest of the parties, it may be established that the company will not distribute dividends for a certain period of time or, alternatively, that the company will have to distribute every year a percentage of its profits.

Question 20

How are SHA regulated in listed companies?

Answer 20

Section 531 of the Spanish Companies Acto provides that entering into a SHA in a listed company is to be considered a relevant information that must be available to the public through:
i. its communication to the CNMV
ii. publication in the CNMV’s website
iii. filed with the Mercantile Register
when such SHA:
i. regulates the exercise of voting rights at the company’s general shareholders meeting
ii. imposes restrictions to the free transferability of shares or convertible bonds

The regulation of these two issues will not be effective until it has been complied with the established regulation.

Question 21

When can the CNMV dispense the obligation to comply with the SHA (in a public listed company?

Answer 21

When it can harm the legitimate interest of the parties.

Question 22

What is a joint venture?

Answer 22

It is an association between two or more independent parties with the objective of developing a business together

Question 23

When are JV used?

Answer 23

When different parties attempt to execute a project that requires the combination of diverse capabilities that each party cannot provide on its own.

To this end, the parties to a JV join forces and share liabilities contributing to the execution of the project through diverse means.

Question 24

What are the several legal structures JV can have? (3)

Answer 24

1. JV can operate through the formation of SPV to which the parties contribute equity and other assets.
2. Business operated by one of the parties to the JVC and the other parties acquire a stake in the capital of the first.
3. Parties remain absolutely independent from one another and the JV will be of an exclusive contractual nature.

Question 25

What is the applicable law to JV?

Answer 25

It is an atypical contract, not regulated by any concrete Spanish Law and allowable in conformity with the principle of freedom of enterprise stated in the Spanish legal system.

However, Competition law has implications on joint venture:

1. Arts 81 to 86 of the Treaty of Rome
2. Spanish Antitrust Law

Question 26

What does article 81 of the Treaty of Rome forbids?

Answer 26

It forbid the agreements between companies that could affect the trade among Member States and which purpose or effects are: blocking, restricting or falsifying the fair competition within the Common Market.

However, such agreements will be allowed if the following conditions are met:

a. The agreement helps to improve the production or distribution of the products or to promote the technical or economic progress
b. Reserves the users or consumers an equitable participation in the profits
c. Providing that unnecessary restrictions to the competence are not imposed
d. Providing that the competition is not completely eliminated with respect to a substantial part of the products.

Question 27

What do JV contracts include?

Answer 27

1. Purpose: it is important to define the purpose and finality of the JV.
2. Condition precedent: in conformity with antitrust regulation on concentrations between undertakings, the prior notifications of the JV is to be required to the antitrust authorities
3. Formalization.
4. Contribution of the parties
5. Reinforced majorities/corporate control
6. Restrictions to the transferability of shares/rights to leave
7. Block
8. Other causes for the termination of the contract such as expiration of the term and mutual agreement.
9. Breach of the JVC by one of the parties like options to purchase or sale in condition favorable to the non-breaching party.
10. Management of the joint venture:
    a. Non competition
    b. Market conditions
    c. Financial and general management
    d. Business plan and annual budget
    e. Dividends**
11. Funding of the financial necessities of the JV:
    a. Stock or debt
    b. Shareholders’ loans