The shareholders' agreement is the most important — and most frequently absent — document in a Spanish middle-market company. We analyse the key clauses governing a sale and how their absence can block or increase the cost of an M&A transaction.
The shareholders’ agreement is, paradoxically, the most important and most overlooked document in a company’s life. While everything is going well — the partners get along, the company grows, there are no difficult decisions — the shareholders’ agreement seems unnecessary. It is a piece of paper that was signed (or not) at the beginning and has spent years in a drawer.
Until the time comes to sell.
At that point, the shareholders’ agreement — or its absence — becomes the determining factor in whether the transaction closes without incident, is complicated for months, or is lost definitively.
A buyer who wants to acquire 100% of a company needs all shareholders to sell. In a family business in the Spanish middle market, it is common to have multiple shareholders: the founder with 60%, their sibling with 20%, a brother-in-law with 10%, a former partner with 10%.
Without a shareholders’ agreement, each of these shareholders is free to negotiate individually with the buyer. The sibling may demand a higher price. The brother-in-law may refuse to sell. The former partner may disappear. And the buyer, who needs 100%, finds themselves negotiating with four parties instead of one, each with their own interests and their own lawyer.
The shareholders’ agreement solves this problem in advance. It establishes the rules of the game before the game begins, when positions are reasonable and there is no money on the table distorting negotiations.
The most important clause for a sale. The drag-along allows the majority shareholder (or a minimum percentage of shareholders) to compel the other shareholders to sell their shares to the same buyer and on the same terms.
The typical mechanism: if a shareholder owning more than 50% (or whatever percentage is agreed) receives a binding offer for 100% of the company, they can activate the drag-along and compel the minority to sell. The price is the same for everyone, the conditions are the same, and the deal closes without blockages.
Without drag-along, a 5% shareholder can refuse to sell and force the buyer to accept a 95% stake — something most buyers do not want — or to negotiate individually with the minority at a price above the rest.
The complement to the drag-along. The tag-along protects the minority shareholder: if the majority sells their stake, the minority has the right to sell theirs on the same terms.
This prevents the majority from selling and leaving the minority as a partner of a buyer they did not choose, in a company they do not control. The tag-along is fair and reasonable, and its absence can generate litigation.
Before being able to sell to a third party, the selling shareholder must offer their shares to the other shareholders on the same terms. The existing shareholders have a period (normally 30-60 days) to exercise or waive the right.
The ROFR protects the composition of the shareholder base but can slow down a sale if it is poorly drafted. It is crucial that the agreement sets short deadlines and clear mechanisms to prevent the ROFR from becoming a blocking tool.
Shareholders commit not to transfer their shares for a specified period (typically 3-5 years). This provides shareholder stability and prevents a shareholder who has just entered from selling the next day.
In the context of an M&A transaction, the lock-up can be a problem if it coincides with the time when a sale is desired. The agreement should provide exceptions for joint 100% sales.
Protects shareholders against capital increases that reduce their percentage holding. Especially relevant when an external investor (a private equity fund, a financial partner) enters, as they may wish to carry out future capital increases.
The agreement should establish how the company is valued in case of forced exit (exclusion of a shareholder, activation of drag-along, exercise of a put option). The most common options are a valuation by an independent expert, a predefined formula (EBITDA multiple, adjusted book value), or the price offered by the third-party buyer.
The choice of method has enormous practical consequences. A predefined formula offers certainty but may be unfair at a given moment. An independent expert offers precision but is slower and more expensive. The third-party price is the fairest but only exists when there is an actual buyer.
We have seen deals collapse due to the absence of a shareholders’ agreement. The most common scenarios:
The disappearing shareholder. A 5% shareholder who does not answer calls, signs nothing, and does not attend meetings. Without drag-along, the deal cannot close at 100%.
The shareholder who demands more. A minority shareholder who, upon learning of the sale, demands a price above what was agreed with the buyer. They know their signature is needed and convert it into bargaining currency.
The shareholder who does not want to sell. A family member with an emotional attachment to the company who refuses to sell. Their decision is respectable, but it blocks a transaction the other shareholders want and need.
The shareholder in conflict. Two siblings who do not speak. One wants to sell, the other does not. Without resolution mechanisms, the company is paralysed.
In all these cases, a solution exists but it is more expensive, slower, and more uncertain than if a shareholders’ agreement were in place. Resort is made to mediations, forced negotiations, statutory interpretations, and, in the worst case, court proceedings.
The ideal time is when incorporating the company or when bringing in a new shareholder. At that point, positions are balanced and nobody knows who will want to sell first.
The second-best time is now. If your company has more than one shareholder and no shareholders’ agreement, the risk of a future transaction being complicated is real. A sale does not need to be on the horizon — a shareholders’ agreement is insurance that it is better to have before you need it.
Negotiating the agreement with existing shareholders can be delicate — nobody wants to sign something that limits their options — but it is infinitely easier than negotiating the same issues with real money on the table.
A common confusion: are the articles of association not enough to regulate these matters? The answer is that articles of association have limitations that a shareholders’ agreement does not.
The articles are public (registered at the Commercial Registry) and subject to the restrictions of the Companies Act. The shareholders’ agreement is private and can include clauses that the articles do not permit or that the parties prefer to keep confidential.
Best practice is a combination: the articles contain clauses with third-party effect (transfer restrictions, enhanced majorities) and the shareholders’ agreement develops the more detailed and confidential aspects (drag-along, tag-along, non-compete, dividend policy, board composition).
At Blue Mountain, analysing the shareholders’ agreement — or its absence — is one of the first tasks of any due diligence. If you are considering selling your company and do not have a shareholders’ agreement, or if the one you have is outdated and incomplete, contact our team. Resolving it now will be much easier and cheaper than doing so during negotiations.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
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