Legal aspects of technology based companies: the partnership agreement in the startup and its validity in Spain

Legal aspects of technology based companies: the partnership agreement in the startup and its validity in Spain

A ‘ start-up’ or technology-based company is a term used to define an emerging company with a high technological component and which usually develops an innovative idea.

To determine the special legal nature of the initiatives with a high innovative component, the Spanish Government has submitted to a prior public consultation the preparation of the preliminary draft text of the future “Law for the Promotion of the Start-up Ecosystem” ,giving a general definition of  Start-up  those “start-ups, usually funded by entrepreneurs, technology – based, innovative and with high capacity for rapid growth.”

Laws for startups in Spain

As the previous text indicates, the activity of the start-ups is subject in Spain to laws of different nature such as tax, mercantile or corporate, which do not take into account the particularities of these new business models, even though there is current regulation in matters of entrepreneurship, such as Law 11/20 1 3 of July 26, regarding measures to support the entrepreneur, Law 14/2013, of September 27, on support for entrepreneurs and their internationalization, or Law 5/2015, of 27 April, for the promotion of business financing that regulates “crowdfunding”, those regulations “ have been overcome by the reality of the innovative ecosystem  .

From a legal regulation point of view, these new digital economy models have created new sectors that in Spain lack legal regulation or to which the current Capital Companies Act must be applied (Royal Legislative Decree 1/2010, of July 2) since “start-up” usually adopts the legal form of Limited Liability Company, lacking its own model.

One of the main legal issues of start-up is the legal form of it. The founding partners must determine under what legal form they will develop the activity, being usual the constitution of a Limited Liability Company, which are governed by the provisions of the Capital Companies Act regarding the requirements for its constitution and content of the articles of incorporation. Also, the founding partners usually sign a private contract.

Spanish Supreme Court (sentence of February 14th, 2018), defines those private agreements like those pacts by means of which  the partners intend to regulate, with the force of the obligatory link, aspects of their partnership without using the channels specifically foreseen for it in the corporate law and company’s articles of incorporation”.

Private shareholder agreements are also provided for in article 29 of the Capital Companies Act although it establishes that “ they will not be binding to the company”

What are the most common shareholder agreements in startups?

By way of example, usual shareholder agreements in a start-up are: the contributions made by each of the partners, day-to-day management of the start-up, roles and responsibilities of each partner, obligations in terms of permanence, non-competition and dedication commitment, consolidation of the shares of the founding partners (“ vesting “), rewards and incentives, “union of vote” by which several partners agree that they will vote in a certain sense in the board, separation of partners (“ good  leavers “and” bad leavers “), contracting policies, regime of the transfer of the shares, priority preferential acquisition rights with respect to the shares of the other partners in case of sale to a third party (clauses “drag along“ and “tag along”) , valuation of the start-up, destination of profits or dividends, resolution of conflicts between partners and resolution of blocking situations. The agreements can also be with third parties, for example, for the incorporation of new partners or investors, who subscribe future capital increases.

One of the main issues that arises, given the non-enforceability of agreements in front of the company, it is whether it is possible to challenge a resolution of the shareholders meeting for breach of the private agreement subscribed by the partners.

Supreme Court in December 10th, 2008 and March 6th, 2009 sentenced that a resolution of the shareholders meeting cannot be challenged because it is contrary to a private partners agreement, but just for being against the law, the company statutes or the interest of the company for the benefit of one or more partners or third parties, so the mere breach of the private contract subscribed by the partners is not, by itself, enough for the annulment of a resolution adopted in a shareholders meeting”.

However in the judgment of February 25, 2016  Supreme Court considers that the partner that has given its consent to a certain distribution of the shares (obtaining certain advantages from it) and agrees on a specific regime for the voting rights associated with these shares, it is not acting on a good faith bases when it challenges the corporate resolutions approved at the shareholders meeting at which the voting rights were used as agreed.

Also in the sentence of the Supreme Court of November 3, 2014, it is considered null the social agreements of approval of company accounts that omit the existence of a private contract between shareholders (agreement that describes a swap operation to obtain the extension of the social capital with disbursement of non-monetary contributions), because it does not reflect the real image of the social patrimony and it is affirmed that it is not possible to speak of pacts hidden for the company when those agreements are manifestly known by the company.  In this case, the shareholders’ agreement was signed by the sole partner and administrator of the company together with a third party, future partner of that company.

For these reasons, it is reasonable to conclude that the contents of private shareholder agreements should not be against rules of Company Law, and, as far as possible its provisions must be incorporated in the statutes/deed of incorporation of the company , in order to avoid contradictions between the statutory and extra-statutory regimen, with the consequent problems for the desirable development of the corporate activity that could arise.

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