Shareholders’ Agreement in the Balearic Islands: How to Prevent Disputes Between Shareholders

Which types of capital companies are most commonly used in the Balearic Islands?

Capital companies are one of the most common forms of business organisation in Spain and are primarily governed by Royal Legislative Decree 1/2010 approving the Spanish Companies Act (Ley de Sociedades de Capital).

Among the various corporate structures available, the most widely used remain the Private Limited Company (Sociedad de Responsabilidad Limitada – S.L.) and the Public Limited Company (Sociedad Anónima – S.A.).

In the Balearic Islands, and particularly in Mallorca and Ibiza, the Private Limited Company is generally the preferred structure for family businesses, holding companies, real estate projects, tourism-related businesses, and small and medium-sized enterprises. By contrast, the Public Limited Company is more commonly used for larger-scale business projects or corporate structures anticipating external financing or the entry of new investors.

Both structures allow business activities to be carried out through an organisation with its own legal personality, although they differ significantly in terms of structure and operation.

What are the differences between a Private Limited Company and a Public Limited Company?

The choice between a Private Limited Company and a Public Limited Company will depend on the specific characteristics of the business project, its financing requirements and its growth objectives.

From a legal perspective, Article 4 of the Spanish Companies Act establishes that the minimum share capital of a Private Limited Company is one euro, whereas the minimum capital required for a Public Limited Company is €60,000.

However, Article 4 of the Spanish Companies Act also contains specific provisions applicable to Private Limited Companies whose share capital does not reach €3,000.

Advantages of a Private Limited Company (S.L.)

The principal advantages of a Private Limited Company include:

• lower incorporation and management costs;
• greater control over the admission of new shareholders;
• a simpler organisational structure for small and medium-sized businesses;
• particular suitability for family businesses and holding companies.

The more closed nature of this structure explains its widespread use in Mallorca, Ibiza and throughout the Balearic Islands.

Advantages of a Public Limited Company (S.A.)

A Public Limited Company is generally more suitable for larger business projects or those with significant growth ambitions.

Its principal advantages include:

• facilitating the entry of investors;
• suitability for large-scale business ventures;
• access to capital markets and, where appropriate, stock exchange listing;
• facilitating certain corporate transactions and business expansion processes.

No corporate structure is universally better than another. The appropriate choice should always be made according to the specific circumstances and requirements of each project.

What should be taken into account when incorporating a capital company?

The incorporation of a capital company is governed by the Spanish Companies Act.

Article 20 expressly provides that:

Article 22 of the Spanish Companies Act further provides that the deed of incorporation must include, among other matters:

• the identity of the shareholders;
• the intention to incorporate a capital company and the choice of the relevant corporate structure;
• the contributions made by the shareholders;
• the company’s articles of association;
• the identity of those who will initially assume management and representation of the company.

The deed of incorporation and the articles of association constitute the legal foundation upon which the business activity will be developed.

However, commercial practice demonstrates that certain situations arising during the life of a company are not always regulated in detail within the articles of association, particularly where several shareholders have differing interests or expectations.

Why is proper corporate planning important?

The incorporation of a company should not be regarded merely as a formal requirement for commencing business activities.

Proper corporate planning enables the organisational and legal framework governing relations between shareholders and the operation of the business to be established from the outset.

During the early stages of a business venture, there is often a convergence of interests among those involved. Over time, however, issues may arise relating to management, financing, the admission of new shareholders or the transfer of shares, making it advisable to have clearly defined mechanisms in place in advance.

Experience demonstrates that a properly designed corporate structure can contribute significantly to greater legal certainty in the conduct of business activities.

How can disputes between shareholders be prevented?

One of the most common questions in corporate law is how to prevent shareholder disputes before they affect the operation of the company.

Disagreements may arise for many reasons, including differences regarding business strategy, profit distribution, the entry of new investors, the transfer of shares, or matters relating to the day-to-day management of the business.

Where such situations have not been anticipated, they can create difficulties affecting decision-making processes and the normal operation of the company.

In this context, shareholders’ agreements have become one of the most widely used tools for regulating specific situations and establishing rules tailored to the particular needs of each business project.

What is a shareholders’ agreement?

A shareholders’ agreement is an agreement entered into by all or some of the shareholders for the purpose of regulating certain aspects of their internal relationships and the operation of the company.

Its contents may be adapted to the specific characteristics of each business and may supplement matters that are not regulated in detail within the articles of association.

Its primary purpose is to provide predictability and clarity in relations between shareholders.

What does the Spanish Companies Act say about shareholders’ agreements?

The legal basis of shareholders’ agreements derives both from the principle of freedom of contract recognised under the Spanish Civil Code and from the Spanish Companies Act itself.

In particular, Article 28 of the Spanish Companies Act provides that:

This provision grants considerable flexibility to adapt corporate organisation to the specific needs of each business project, within the limits established by applicable law.

Are shareholders’ agreements enforceable against the company?

A particularly important issue concerns the legal effectiveness of shareholders’ agreements.

In this regard, Article 29 of the Spanish Companies Act expressly states:

This means that agreements entered into between shareholders generally produce legal effects only between the parties who have signed them.

For this reason, proper coordination between the articles of association and any shareholders’ agreement is an important consideration within any corporate structure.

What clauses are commonly included in a shareholders’ agreement?

There is no standard form of shareholders’ agreement. Its contents will depend upon the specific characteristics of the company and the objectives pursued by the parties involved.

However, common provisions often include:

• lock-in commitments;
• non-compete obligations;
• dispute resolution mechanisms;
• dividend distribution policies;
• pre-emption rights;
• regulation of the transfer of shares;
• decision-making procedures.

Among these provisions, particular importance is often attached to mechanisms governing the entry and exit of shareholders.

• Drag Along Rights. Drag-along provisions allow for certain circumstances in which, under conditions agreed by the parties, a collective transfer of shares may be implemented in connection with specific corporate transactions.
• Tag Along Rights. Tag-along provisions are intended to provide protection in certain share transfer situations, allowing specified shareholders to participate in the transaction under the conditions established within the agreement itself.

What is the liability of a company director?

Another important aspect of any capital company is the legal regime applicable to its directors.

The existence of a company with separate legal personality does not eliminate the legal obligations associated with holding a management position.

In practice, many individuals assume the role of director believing that the existence of a company completely limits their personal liability. However, the exercise of management functions entails certain legal obligations and, in specific circumstances established by law, may give rise to financial consequences for those performing such functions.

For this reason, it is particularly advisable to understand the scope of the obligations inherent in company management and to act with the level of diligence required in each case.

Article 236 of the Spanish Companies Act provides that directors shall be liable to the company, its shareholders and its creditors for losses caused by acts contrary to the law, the articles of association, or acts carried out in breach of the duties inherent in their office.

Furthermore, company law imposes duties of care and loyalty upon directors, requiring them to act in the best interests of the company and avoid conflicts of interest.

Particular importance should also be attached to Article 367 of the Spanish Companies Act, which establishes certain liability regimes relating to statutory grounds for dissolution and the failure of directors to comply with their legal obligations in such circumstances.

The application of these liability regimes will always depend upon the specific facts of each case.

Shareholders’ Agreements in Mallorca and Ibiza: A Corporate Planning Tool

The characteristics of the Balearic business environment make shareholders’ agreements particularly valuable in Mallorca, Ibiza and throughout the Balearic Islands.

Many businesses in the Balearic Islands operate through companies involving different categories of investors, managers or family members, making proper regulation of internal shareholder relationships especially advisable.

In this context, shareholders’ agreements constitute a commonly used tool for organising certain corporate matters and facilitating the management of situations that may arise throughout the life of the business.

Conclusion

The incorporation of a capital company is a significant legal and commercial decision. Selecting the appropriate corporate structure, understanding the key characteristics of capital companies and properly defining internal governance rules are matters deserving careful consideration from the earliest stages of any business project.

In this context, shareholders’ agreements in the Balearic Islands have become a widely used instrument for regulating relationships between shareholders and organising matters that may be relevant to the development of business activities.

Together with appropriate corporate organisation and a proper understanding of the responsibilities inherent in management bodies, these mechanisms can contribute to greater legal certainty and predictability in the operation of companies in Mallorca, Ibiza and throughout the Balearic Islands.

In such cases, the team at Frau Legal can assist you throughout the entire process, advising on the most appropriate corporate structure for your business, the drafting of shareholders’ agreements, and all necessary formalities relating to company incorporation before a notary, the Commercial Registry, banking institutions, the Spanish Tax Agency and other relevant authorities.

Likewise, if you already have an existing company and wish to regulate shareholder relationships appropriately, whether such arrangements should or should not be enforceable against third parties, we can assist in designing a shareholders’ agreement tailored to the real needs of the business and the specific circumstances of those involved.