The second structure considers the execution of an agreement between shareholders (joint venture agreement), which is a commercial agreement in which the parties agree to develop, for a limited or unlimited time, a new entity and new assets by contributing capital, or to participate in an already existing corporation through capital contributions.
Although shareholder agreements are sometimes used to participate in small and medium-sized companies, large corporations also use this method to diversify their investments.
Agreements between shareholders can guarantee the success of smaller projects for those who are just starting out in the business world or for already established medium-sized companies that want to have gradual growth through new investors. Since the cost of starting new projects is generally high, a shareholder agreement allows both parties to share the burden of the project as well as the benefits resulting from it.
An agreement between shareholders regulates the commercial relationship of the parties that create a new corporation and would normally have to regulate the following matters:
1. The ownership and voting rights of the corporation's shares, including without limitation:
- Restrictions on the transfer of shares, or the granting of guarantees over them;
- Preferential rights related to the shares issued by the corporation;
- Joint purchase and sale rights ("Drag-alog" - "Tag-along"); and
- Provisions related to the protection of minorities.
2. Control and management of the corporation, which may include, among others:
- Power for certain shareholders to appoint members of the Board of Directors;
- Impose supermajority voting requirements for "relevant matters" that are of key importance to shareholders; and
- Impose requirements to provide shareholders with accounts or other corporation information to which they would not otherwise be entitled by law.
3. Dispute resolution mechanisms.
4. Non-compete and non-solicitation provisions.
5. Other corporate provisions, which may include, among others:
- Nature and amount of initial capital contributions and future capital contributions;
- Installation and voting quorum for shareholder meetings;
- Appointment of legal representatives, including the joint or separate exercise of their powers; and
- general corporate practices.
This is the agreement that is most frequently used and like any merger and acquisition transaction, in the case of investments in existing companies, it will be subject to a prior legal audit to identify any potential operational risk.
It is important to mention that in the preparation of this type of agreement, the accounting, tax and legal advisors must have due communication to draft a functional agreement that, when necessary, can be terminated with the least possible complexity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.