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Memorandum of association or shareholders' agreement, family protocol

There is a constantly increasing interest of shareholders, especially those belonging to the younger generation, addressing certain questions or aspects related to the cycles of a company, or relations with other shareholders. The queries rise, irrespective of whether they are family businesses or not. When it comes to deliberate about family business, we recommend the regulation of business or social agreements, by means of the so-called family protocol, which contains all or part of these agreements.

Key point is: Important agreements for the future development, both of the business transactions and of the relations between the partners, should be recorded in writing. This measure can avoid future litigation, which we do not recommend to any of our clients, particularly in the current scenario where judicial pursuits are affected by notorious delays.

I will focus on matters governed by agreements between partners or family protocols, separately, although I anticipate that basically, there are no particular limits fixed. However, it is compulsory to be clear about the goals you want to achieve with these agreements. Our task as professionals is to protect your interests because, after all, that is what you pay us for....

Supreme Court Judgment 120/2020

In fact, the latest Supreme Court ruling number 120/2020, dated 20/02/2020, by the Excellency Mr. Juan María Díaz Fraile is particularly interesting. It is to him that we owe the clarity in his remarks and the dispute of the fundamentals. His legal arguments are absolutely revealing. We hope that this magistrate will keep substantiating his arguments with the same clear expressions in the future, also spurring other colleagues to exhibit their judgments in understandable, more natural language... this would make the deal with our clients so much easier!

Paper is patient. Often there are disputes based on agreements that have been fixed in writing and that we consider as legal. Then, after some time, it turns out that these agreements do have various snags. The content of the above-quoted judgement enables me to give you several suggestions in the field of company law that may be useful for your own companies.

However, I would like to point out that I will refrain from going into scientific, legal analyses that would be more suitable for other forums. With my contribution today, I would merely like to provide a summary of the most important points:

1- Validity of the shareholders' or partnership agreement

The Supreme Court once again ratifies, without any doubt, the validity of these agreements as long as they do not exceed the limits of the autonomy of will. This means that, as usual in the legal process, it will never be possible to give validity to an agreement, even if signed by the parties, which is against the law, morality or public order.

Imagine, for example, that a family protocol stipulates that a certain race or gender (and I have effectively found this in some protocols, no doubt dating back to older times!) is not allowed to enter the family business for employment.

2 - Family protocol as a form of shareholders' or company agreement

The Supreme Court examines the FAMILY PROTOCOL. It defines it as one of the modalities of the company agreement, but warns that in practice, these protocols have a wide scope and heterogeneity. Legally binding stipulations and declarations as well as arrangements of moral value without legal enforceability are usually agreed in this protocol. These function do act as non-binding "codes of conduct" or "gentleman's agreements".

3 - Legal effectiveness of the family protocol

The legal effectiveness of the FAMILY Protocol is one of the aspects presenting headaches; and this arises when company agreements are not implemented or executed by the companies concerned or, where appropriate, by their inclusion in the articles of association. In the latter case, the conflict merges out of the existence of two contradictory sets of rules arising from the statutes (or from the supplementary legal provisions in the absence of a specific provision in the statutes) and among such company agreements that have been established but not transferred to the company's statutes, although in principle both are valid in principle.

4 - Ideas for the proper implementation of social pacts and family protocols

The aforementioned magistrate gives some helpful ideas for an accurate execution of these agreements or protocols. Here are some highlights:

  1. The family protocol should be a framework agreement. Thus, it is necessary to give it an effective virtuosity through the appropriate execution of its provisions.

  2. These business or execution documents can be family (e.g. marriage contracts), succession (wills or inheritance contracts) or corporate (amendments to the articles of association).

  3. Setting up an obligation to comply with the family protocol ancillary is one of the measures we are already implementing in our assessments. In this way, the breach is sanctioned with the exclusion of the offending partner.

  4. Giving an "ad extra" effect through a notice in the commercial register.

5 - What happens if the partnership agreement or family protocol contradicts the articles of association?

Unfortunately, this scenario becomes true more than enough times.

In views of this contradiction, the Spanish Supreme Court states: when it comes to challenging a shareholders' agreement adopted by the shareholders' meeting or by the board of directors, the Spanish Supreme Court will reject the objection based on the violation of the provisions of a shareholders' agreement.

In order to maintain the legal challenge, the breach of the shareholders' agreement must be accompanied by a simultaneous breach of the law, of the shareholders' agreement, or by a violation of the interests of the company in favour of one or more shareholders or third parties.

However, there are also exceptional cases where the resolution to be adopted in its various manifestations - own acts, lifting the veil - is contrary to good faith, or involves an abuse of rights.

Apart from these cases (breaches of the requirements of good faith, abuse of rights), the effectiveness of the perfectly lawful shareholders' agreement can only be defended by an action between those who signed such agreements. In this case, the company cannot act as a party, as it is not a corporate action.

Top important: if you believe that one of your shareholders (or as in this case, the children of your deceased shareholder) has breached a shareholders' agreement or the family minutes, we advise you to desist from challenging that shareholders' agreement, as a loss of the case with the associated costs could be the result; unless there is an abuse of rights or good faith. It is more appropriate in such cases to bring a claim for breach between the signatory parties without involving the company.

6 - Lasting, real or personal relationship

Another important point of the doctrine that I would like to highlight today, and which the Magistrate also addresses, concerns the signing of those agreements that create obligations with our partners that are not limited in time.

Attention! The Supreme Court scrutinises voting agreements between partners down to the smallest detail. In this sense, the Magistrate explains the prohibition on the indisputability of permanent links in our civil law, regardless of whether they are real or personal.

Subsequently, the validity of permanent syndicate contracts cannot be recognised as they do violate the principle of freedom of contract and personal and property disposition, which are general principles.

7 - Family protocol and commercial company contract; features that are different, but interrelated

The Supreme Court concludes that the family protocol and the commercial corporate contract operate on different but interrelated levels. Thus, the latter, which is reflected in the company agreement, is subject to the mandatory rules of company law. Shareholders' agreements are valid and lawful as long as they do not violate the law, morality or public order.

We consider this topic as absolutely interesting. Our assessments will continue with further publications on PARTNERSHIP AGREEMENTS AND FAMILY PROTOCOLS. In the meantime, our Legal Department will be pleased to answer any questions you may have in this context. Feel free to reach out for us!

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