Shareholders’ agreements and good faith

Shareholder conflicts now have a new limit: consistency with what you signed

In family-owned and closely held companies, the shareholders’ agreement is the document that governs what the articles of association do not address: how dividends are distributed, how assets are separated between family branches, and which majorities protect minority shareholders. The practical question many clients ask is what happens when one of the signatories changes their mind and later challenges, at a shareholders’ meeting, the very resolutions that implement that agreement. The Spanish Supreme Court has now given a clear answer: they cannot do so without acting contrary to good faith.

The case: two family branches, one agreement and a dividend in kind

The dispute involved two family branches that together held 100% of the share capital of a limited liability company. In 2015, all shareholders entered into an omnilateral shareholders’ agreement — signed by the entire share capital — setting out a roadmap for the gradual distribution of real estate assets, the separation of assets between the two family branches, a commitment to vote each year in favour of a minimum dividend of 50% of profits, and a clause establishing the prevalence of the agreement over the articles of association in the relationships between shareholders.

At the shareholders’ meeting held in June 2018, the 2017 annual accounts were approved and an interim dividend was ratified, paid partly in cash and partly in kind through the allocation of real estate assets. A minority shareholder, who had voted against the resolutions, challenged them. She argued that the articles of association did not provide for distributions in kind, that the valuations were outdated, and that the majority had acted abusively to the detriment of the company’s interest.

What the Supreme Court decided

The Supreme Court dismissed both the extraordinary appeal for procedural infringement and the cassation appeal, confirming the validity of the resolutions. Two key ideas underpin the ruling:

An omnilateral shareholders’ agreement may replace the unanimity that the law or the articles of association would otherwise require. Although the articles did not expressly provide for distributions in kind, a systematic interpretation of the agreement — gradual distribution of assets, separation of assets, minimum dividend — made it possible to conclude that such distribution had been implicitly authorised by all shareholders.

Challenging what one had undertaken to implement is contrary to good faith. A shareholder who signed the agreement and, moreover, received the dividend to which she was entitled under it, cannot later challenge the resolutions that implement it: the other signatories had a legitimate expectation that her conduct would be consistent with what had been agreed.

This is not new doctrine, but rather the consolidation of an existing line of case law: the Supreme Court reiterates what it had already held in previous judgments regarding omnilateral shareholders’ agreements and the challenge of corporate resolutions.

The underlying principle: good faith as a limit on minority shareholder tools

This judgment should not be read in isolation. It forms part of a broader trend in which the courts have been narrowing the scope for the use — and abuse — of the traditional tools available to minority shareholders. The same logic of good faith and prohibition of abuse of rights can be seen in case law on the withdrawal right for insufficient dividends, where the Supreme Court has accepted that its exercise may be abusive when the shareholder’s true intention is not to receive the dividend, but to force their exit from the company. The message converges: shareholder rights exist to protect a legitimate interest, not to instrumentalise conflicts.

What this means for your shareholders’ agreement

What you truly want to protect should be included in the articles of association whenever possible. The agreement binds those who sign it; the articles add enforceability against third parties and access to the Commercial Registry. They are complementary layers, not interchangeable ones.

What you sign binds you. If you entered into the agreement, you will not be able to contradict yourself by challenging the resolutions that implement it, especially if you have benefited from them. Consistency with one’s own acts is now an effective limit, not a merely rhetorical one.

An omnilateral shareholders’ agreement carries reinforced legal weight. When it is signed by 100% of the share capital, the unanimity required by law for certain decisions may be deemed satisfied by the agreement itself, even if it is not reflected in the articles of association.

Define the roadmap and the internal dispute-resolution mechanism. Distribution, asset separation, minimum dividend and a body for resolving differences — such as an advisory board — reduce litigation and strengthen the position vis-à-vis a dissenting shareholder.

For investors and funds, symmetry matters. Minority protections that have been agreed are valid; but the signatory is also bound by them. Veto rights and reinforced majorities should be carefully calibrated, without creating a disguised unanimity requirement that risks paralysing the company’s corporate bodies.

How we approach it

Designing a shareholders’ agreement capable of withstanding conflict requires anticipating how a court may interpret it years later. At Seegman, we advise family businesses, shareholders and international investors on structuring shareholders’ agreements and family protocols that are consistent with their asset-planning strategy and properly reflected in the articles of association and the Commercial Registry.