A shareholders’ agreement can set out in detail what should happen if a founder leaves the company, breaches their commitments, or a majority decides to sell the company. However, when the time comes to enforce those provisions, a problem can arise: the transfer of the shares may depend precisely on the signature or consent of the very shareholder who is obliged to sell them. This is where prior consents and irrevocable powers of attorney come in: the instruments that make it possible to carry out that transfer even if the obliged party does not cooperate.
This can happen, among other cases, when founders’ shares are subject to reverse vesting arrangements, or in certain leaver scenarios (leaver) triggered by a breach of personal obligations (granting a call option over their shares), or, more generally, for any shareholder, as happens when the so-called drag-along right (drag along) is triggered.
For this reason, when negotiating and executing a shareholders’ agreement, it is not enough to correctly define the parties’ rights and obligations. It is also important to anticipate which consents, powers of attorney and documents will be needed to enforce them in the future.
1. Community property regime and shares: the spouse can matter even if not a shareholder
One issue that can easily be overlooked is the matrimonial property regime of shareholders who are individuals, particularly where a community property regime (sociedad de gananciales) applies.
Where shares qualify as community property, formal title held by only one spouse does not necessarily mean that spouse can freely dispose of them. As a general rule, disposing of community property for consideration requires the consent of both spouses.
This issue should be addressed when the agreement is executed, not when the transfer needs to be carried out. A common solution is for the non-shareholder spouse to appear when the shareholders’ agreement is notarized, to be made aware of the obligations affecting the shares, and to grant the necessary consents in advance for their future enforcement.
2. Founders, reverse vesting and transfer obligations
In venture capital transactions, founders typically assume commitments regarding continued involvement, exclusivity, non-competition or dedication, with part of their shares subject to reverse vesting mechanisms.
A breach of those obligations, or the founder’s departure, can trigger a call option over all or part of their shares, with a price that typically varies depending on whether the founder is treated as a Good Leaver or Bad Leaver.
The problem arises if, once the option has been triggered, the founder refuses to appear before a notary public to transfer their shares.
For this reason, in addition to carefully regulating the leaver event, the procedure and the price, it is advisable to put in place from the outset a mechanism that allows the transfer to be carried out without depending on a further voluntary act by the defaulting founder.
3. The drag-along right (drag along): everyone agrees to sell today, but the sale will happen tomorrow
The same problem can arise with the drag-along right, or drag along. Under this clause, certain shareholders can force the rest to transfer their shares once the agreed conditions for a sale of the company are met.
When the agreement is signed, everyone accepts this obligation. However, a sale may take place years later and require dozens of shareholders to appear before a notary or sign the sale and purchase documentation.
If one of them does not cooperate, having a contractual obligation to sell does not necessarily solve the operational problem of closing. For this reason, shareholders’ agreements usually complement the drag along with an irrevocable power of attorney that allows the transfer to be executed on behalf of the dragged shareholder.
4. The irrevocable power of attorney in shareholders’ agreements: mentioning it is not enough
An irrevocable power of attorney in a shareholders’ agreement is the notarial instrument that allows a previously agreed transfer of shares to be carried out even if the shareholder obliged to sell does not appear voluntarily. Shareholders’ agreements often state that shareholders “grant an irrevocable power of attorney” to carry out certain transfers. However, where that power of attorney is to be used to appear before a notary and transfer shares, it must be granted in a notarial deed (either through a specific power-of-attorney deed or as part of the deed notarizing the agreement itself), and the powers granted must be sufficiently well defined to allow their exercise before a notary.
The power of attorney should not be structured as a generic, open-ended authorization to sell the shares. Its irrevocability must be tied to the underlying transaction that justifies its grant (the shareholders’ agreement and the transfer obligations set out in it), and its validity must remain linked to those obligations continuing to exist.
It should also clearly define, among other matters:
- By reference to the shareholders’ agreement itself (provided it has been notarized): the specific circumstances in which it may be exercised; the shares affected; the transfer price or an objective mechanism for determining it;
- how the price must be paid or deposited;
- the documentation required to evidence that the triggering event has occurred;
- the powers to appear before a notary and formalize the transfer; and
- where applicable, express authorization to engage in self-dealing, multiple representation or conflict of interest.
This level of detail is especially important where the beneficiary of a call option may also act simultaneously as attorney-in-fact for the selling shareholder.
5. When is it particularly useful?
Although the drag along is probably the most obvious example, a properly structured irrevocable power of attorney can be useful for enforcing several common mechanisms in a shareholders’ agreement:
- call options arising from Good Leaver or Bad Leaver situations (including transfers of unvested shares subject to reverse vesting);
- drag-along rights;
- retransfer obligations in certain corporate structures; or
- voting syndication mechanisms among minority shareholders that require the coordinated exercise of certain rights.
The key point is that the power of attorney does not replace the shareholders’ agreement; rather, it works as a tool to give effect to obligations previously assumed under it.
6. Closing documentation is also part of the agreement
Negotiations over a shareholders’ agreement tend to focus on economic and governance matters: valuation, majorities, investor rights, vesting, leaver, tag or drag.
However, sound legal structuring requires going one step further and asking from the outset: if one of these clauses has to be enforced in three years’ time and one of the parties does not cooperate, do we have the necessary instruments today to make that happen?
This means reviewing, as of closing:
- the matrimonial property regime of shareholders who are individuals and the consents their spouses must give;
- the transfer obligations assumed by founders and other shareholders; and
- the powers of attorney needed to guarantee their enforcement.
A shareholders’ agreement should not only properly regulate potential future conflicts. It must be designed so that its mechanisms can actually be enforced once those conflicts arise.
At Across Legal, we advise companies, founders and investors on structuring and negotiating shareholders’ agreements and venture capital transactions, anticipating not only what should be agreed, but also how it can be enforced in practice.
📩 If you are preparing an investment round or reviewing your company’s shareholders’ agreement, we can help you identify these risks before closing.
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