In today’s world its common that when a company is managed by different groups of shareholders, whether they belong to the same family or not, a shareholder’s agreement is negotiated and executed (hereinafter referred to as the “Agreement” or the “Shareholders Agreement”) that regulates the relationships between them. This article will not analyze the validity of shareholders agreements under Guatemalan law, but it will focus on summarizing the rights, obligations and procedures that can be included in these agreements in relation to the transfer of shares.
The shareholders of a company generally seek to regulate the transfer of shares to protect them against unknown third parties becoming shareholders of the company. Some of the regulations that can be introduced for this purpose are described below:
- Permitted transfers: This type of Agreements may include the definition of permitted transfers, in which it is not required to follow the procedure established in the Agreement for the transfer of shares. Generally, permitted transfers are defined as those made by a shareholder in favor of a company, trust, or private interest foundation, provided that as a result of the said transfer there is no change of control or the final beneficiaries remain the same. In this context, it will be important to define what is understood by change of control, since sometimes it is understood that there is no change of control, if the shareholders or final beneficiaries of the new shareholder are blood relatives (or by affinity) of the original shareholder or previous ultimate beneficiary. Permitted transfers are relevant, among others, in the following cases, a transfer of shares by succession, transfer of shares as a result of reorganization due to estate or corporate planning. Therefore, when negotiating Shareholder Agreements, special attention should be paid to the definition of permitted transfer and change of control.
- Right of first refusal: The right of first refusal establishes that the shareholders of a company have the right to preferentially acquire shares that any shareholder of that company is selling. The inclusion of this right is intended to protect shareholders and prevent the entry of third parties. It is regulated that prior to a shareholder being able to sell to third parties, it must offer the shares to the other shareholders at the same price and conditions as those offered to the third party. In case one or more of the shareholders declare that they are interested in buying the shares, the selling shareholder must sell the shares to the interested parties in the proportion regulated in the Agreement. It is generally included that the shares are sold pro rata based on the percentage of participation, among all the shareholders who have expressed interest in buying the shares. In this case, it will be important to include in the Shareholders’ Agreement, the procedure to exercise that preferential acquisition right with specific deadlines and an indication of who will oversee said procedure (generally it is the company’s board of directors). It is also recommended to include that if none of the shareholders states their interest in buying the shares, the selling shareholder may not sell the shares to the third party under conditions other than those offered to the shareholders (especially price and payment conditions).
- Tag along: The inclusion of tag along rights was designed to protect minority shareholders of a company, so that they can tag along in the sale of shares by a majority shareholder. When this right is included, if a shareholder wants to sell certain percentage of shares (according to the percentage established in the Agreement), the other shareholders will have the right to tag along and sell their shares as well. If the offer of the third party is not for all the shares, it is generally regulated that the shareholders who exercise their tag along right and the selling shareholder who initiated the procedure for transfer, will sell their shares in proportion to their percentage of participation in accordance with the percentage of shares that the third party wants to buy.
- Drag along right: Drag along provisions protects majority shareholders of a company and seeks that they can force minority shareholders to sell their shares, when the majority shareholder receives an offer to buy their shares and the prospective buyer seeks to buy a greater percentage than the shares owned by the majority shareholder. In this case, it is established that when a shareholder receives an offer for the purchase of a certain percentage of shares (according to what is agreed in the Agreement), the shareholder may force the other shareholders to sell their shares under the same conditions established in the offer received by the majority shareholder. In this case, it is very important to negotiate and include in the Agreement, the minimum percentage that would activate the drag along right, a minimum value at which shareholders are obliged to sell their shares and the way to set or determine the minimum value.
For more information on Shareholder Agreements and the rights and obligations that may be included in these agreements,
Ana Sofía Escriba, Corporate Partner