IBA Guide on Shareholders Agreements

IBA Guide on Shareholders Agreements Colombia Sergio Michelsen Brigard & Urrutia 1. Are shareholders agreements frequent in Colombia? Shareholders agreements are being used with increased frequency in medium and large companies in Colombia. A new type of company (sociedades por acciones simplificadas or SAS ) was created fairly recently. This type of company is extremely flexible and it may render shareholders agreements unnecessary because most of the provisions typically included therein may be incorporated into the bylaws of such companies. Nevertheless, given that SAS cannot be publicly listed in the stock exchange, blue-chip listed companies in Colombia continue to resort to shareholders agreements to regulate affairs among shareholders. 2. What formalities must shareholders agreements comply with in Colombia? With respect to private companies, for a shareholders agreement to be valid and enforceable between the executing shareholders, it suffices that the agreement be in writing. However, for a shareholders agreement to be valid and enforceable also against the company, the following rules must be observed: a. For shareholders to private companies to enter into shareholder agreements in Colombia, except for an SAS (which cannot be publicly listed), Law 222, 1995 (the first regulation with respect to matters relating to shareholders agreements and which remains in force for such shareholders agreements of private companies) is quite restrictive. For such a shareholders agreement to be valid and enforceable also against the company, the shareholders agreement must be filed at the company s registered office, in order for the voting agreements contained therein (as opposed to other agreements such as restrictions on the transfer of shares, etc.) to be enforceable against the company. b. With respect to publicly traded companies, in 2005 Colombian market regulations provided for slightly more flexibility. For a shareholders agreement to be valid, the agreement must only be in writing and filed at the registered office of the company; however, it will also have the disadvantage of having to be publicly disclosed through the Superintendence of Finance s information dissemination platform. Accordingly, if those requirements are fulfilled, all the agreements contained in a shareholders agreement will be enforceable against the parties (yet the agreement will become public), while only voting agreements will be enforceable against the company. Despite the above, shareholders agreements with respect to the transfer of shares do not preempt 1

Colombian securities regulations and the operational rules of the stock exchange trading system. The result is that such agreements can only assure that the parties will commit to launch purchase or sale orders, but not that such orders will be consummated. Therefore, interloper risk is not eliminated. c. Currently, S.A.S. companies provide more flexibility as to both the content of shareholders agreements and their enforceability against the company. With respect to S.A.S. companies, the agreement must be filed at the company s registered office, in order for all agreements contained therein (including restrictions on the transfer of shares, etc.) to be enforceable against the company for a period of ten years (and renewable for an additional ten-year term). 3. Can shareholders agreements be brought to bear against third parties such as purchasers of shares or successors? As a general rule, shareholders agreements are only binding upon their signatories (i.e., the other shareholders) and, whenever they comply with applicable laws, shareholders agreements might be enforceable vis-à-vis the company. Third parties, such as purchasers of shares or successors, are not bound by the shareholders agreement executed by the original shareholders. For such persons to be bound by the shareholders agreement, they would need to agree to become subject to the terms of such agreement. Accordingly, it is customary to condition the transfer of shares (even permitted transfers to shareholders affiliates) on the execution by the transferee of a deed of adherence (i.e. joinder to shareholders agreement). 4. Can a shareholders agreement regulate non-company contents? Colombian commercial law does not prevent shareholders agreements from regulating noncompany matters. If that is the case, Colombian doctrine will consider the shareholders agreement to be an atypical agreement, which is a hybrid between a shareholders agreement and whichever contract generally would otherwise govern such additional non-company content. If shareholders agree on non-company contents in a shareholders agreement, such contents will not be enforceable against the company. 5. Are there limits on the term of shareholders agreements under the law of Colombia? Except with respect to SAS companies, under Colombian law there are no limits on the durational term of shareholders agreements. With respect to SAS companies, a limit of ten years exists, but such SAS shareholders agreement may be extended for an additional ten-year term. After the expiration of such term, the shareholders agreement would no longer be enforceable against the company, but it would continue to be enforceable against the shareholders. 6. Are shareholders agreements related to actions by directors valid in Colombia? 2

Colombian law provides that directors (in fact, managers in general) cannot be parties to shareholders agreements. Therefore, shareholders agreements related to actions by directors would not contractually bind such directors. In addition, since directors owe fiduciary duties to the company (and not its shareholders), a director may be required to refuse to act in accordance with the terms of a shareholders agreement if it is in the best interest of the company. 7. Does the law of Colombia permit restrictions on transfer of shares? Pursuant to Colombian Commercial law, shares are freely transferable. However, since transferability is a right with an economic content, nothing limits the ability of shareholders to agree on restrictions on transfer of shares. To this effect, shareholders agreements usually include different mechanisms to either restrict or limit the transfer of shares under certain conditions, such as lock-up periods, rights of first refusal or rights of first offer, etc. 8. What mechanisms does the law of Colombia permit for regulating share transfers? Under Colombian law, there are neither express restrictions nor mechanisms as to the regulation of share transfers. Therefore, the principle of contractual freedom applies, allowing the parties to a shareholders agreement in Colombia to regulate amongst themselves prospective share transfers. Mechanisms regulating share transfers are enforceable only against the executing shareholders, except with respect to SAS companies where such agreements are also enforceable against the company. It is customary to include mechanisms to regulate share transfers such as: (i) rights of first refusal; (ii) rights of first offer; (iii) tag-along rights; (iv) drag-along rights; (v) put and call options; (vi) IPOs and DPOs; (vii) buyback rights; or (viii) buy-sell agreements, among others. 9. In Colombia do bylaws tend to be tailor-drafted, or do they tend to use standard formats? For medium and large companies in Colombia as well as sophisticated investors (such as private equity funds), tailor-made bylaws have become the rule. Smaller companies are usually established using standard form documentation for purposes of incorporation. 10. What are the motives in Colombia for executing shareholders agreements? Until the creation of SAS companies, the most common form of company was the sociedad anónima, which allowed for very little flexibility in terms of voting agreements, corporate governance, and restrictions on transfers of shares, etc. In this context, shareholders found shareholders agreements useful to set forth agreements and understandings with respect to 3

these and other corporate matters that could not be validly regulated in the company s bylaws. The business or economic rationale underlying shareholders agreements usually arises in connection with private equity investments, the sale of minority stakes, and joint ventures where some shareholders might have an interest in safeguarding the company s interests, confidentiality concerns, etc. As indicated above, SAS companies afford larger flexibility and it is expected that shareholders may resort to the company s bylaws instead of shareholders agreements to regulate corporate matters. It is worth noting that SAS companies cannot trade their stock publicly, so shareholders agreements will continue to be usual and necessary among public companies. 11. What contents tend to be included in shareholders agreements in Colombia? (i) (ii) (iii) (iv) (v) (vi) Rules for capital contributions made by the shareholders to the company; Provisions with respect to the company s governance, such as voting during shareholder meetings, the election and scope of responsibilities of directors, dividends or other distributions, special majority voting requirements for certain corporate decisions, and/or resolution of deadlocks; Conditions to limit or restrict the transfer of shares. To this effect, the parties usually agree on rights of first refusal, rights of first offer, tag- or drag- along rights, lock-up periods or put or call options; Representations and warranties of the shareholders; it is common to include shareholder representations regarding organisation, authorisation and no conflict; Dispute resolution mechanism, including deadlock provisions and special audit procedures to determine the price of put or call rights, among others; or Miscellaneous provisions related to expenses, rules for the assignment of the agreement, applicable laws to the subject matter of the agreement, confidentiality, and severability or non-compete provisions. Apart from the foregoing, it is noteworthy to mention that it is not common to include registration rights provisions in shareholders agreements because in the past, the Colombian capital markets did not have significant depth or liquidity to permit financially viable exits. However, with the launch of the Latin American Integrated Market (the Mercado Integrado Latinoamericano or MILA), practitioners expect to see an increase in registration rights provisions in shareholders agreements, given that IPOs (including by private equity funds for purposes of investment exits) may significantly increase as MILA becomes one of the largest trading platform in Latin America. In any event, the terms set forth in shareholders agreements invariably will be driven by the sophistication and investment strategy of the parties and the relevant transaction. 12. What determines the content included in shareholders agreements in Colombia? The main factors influencing the terms of shareholders agreements include: 4

a. The investment strategy of the parties. The terms of a shareholders agreement may vary depending on: (i) whether one or more of the signatories are private equity funds which may have a strategy to exit the investment within the life cycle of the relevant fund(s); (ii) whether one of the shareholders owns a controlling interest and is merely granting certain protections to the minority shareholders; or (iii) whether no party holds a majority interest and the agreement constitutes a mechanism to build up a controlling block. b. Whether the agreement would be binding upon all shareholders, some shareholders and/or the company; c. Whether the specific content can be legally regulated in the bylaws as opposed to in a shareholders agreement; d. Whether due to the complexity of the company s equity ownership, the flexibility of the shareholders agreement results in corporate efficiencies in contrast with the possible inconveniences the inclusion of such agreements in the company s bylaws might pose; or e. Confidentiality reasons. 13. What are the most common types of clauses in shareholders agreements in Colombia? See supra No. 11. 14. What mechanisms does the law of Colombia permit to ensure participation of minorities on the board of directors and its control? As opposed to other jurisdictions, pursuant to Colombian law, participation of minority shareholders is ensured by their authority to appoint members to the board of directors in proportion to the percentage of their equity interest. However, there are no mandatory provisions that give minority shareholders the right to appoint more members than those determined pursuant to the percentage of their equity interest. Depending on the level of equity ownership, it is possible that minority shareholders may not be able to appoint any board members. The regulations with respect to listed companies provide that at least 25% of the members of the board must be independent, regardless of who appoints such members (whether a controlling shareholder or a minority). 15. Is it possible in Colombia to ensure minority shareholder control by means of a shareholders agreement? It could be possible to ensure minority shareholders control by means of a shareholders agreement. In accordance with Colombian commercial law, a person or legal entity is deemed to have control over a company (i) when such person s or legal entity s equity ownership is equal to or greater than 50%; (ii) when the person or legal entity has the required voting power at the relevant shareholders and/or board of directors meetings to take decisions without requiring additional votes (i.e. quorum); or (iii) when such person or legal 5

entity has dominant influence in the company s decision-making process by means of an agreement entered into with the company or other shareholders. Under scenario (iii), it must be mentioned that Colombian law permits common control by two or more legal entities over a company. Based on the above, if one or more persons acquire the right to cast the vote of a majority by means of a shareholders agreement or otherwise, such person(s) will be deemed, in principle, to exercise control over such company. By virtue of a shareholders agreement, minorities could be deemed to exercise common control over a company, for purposes of determining beneficial ownership in the context of the public securities market, thus important regulatory implications may be triggered. In recent opinions, the Colombian Superintendence of Finance has indicated that a shareholders agreement may, under certain circumstances, result in corporate control and that shareholders could be considered to jointly constitute a beneficial owner (which is the proxy to determine when a public tender offer is required). 16. What are the usual valuation mechanisms in connection with rights of first refusal or share transfer regulations? Customary valuation mechanisms in Colombia include: (i) value based on a multiple of EBITDA or EBIT, (ii) comparable market value, (iii) value based on future earnings, (iv) value based on a multiple of past earnings, or (v) expert assessment with or without predefined methodological criteria. The most common valuation mechanisms are (i) and (v) above. 17. Is it admissible for a shareholders agreement clause to refer dispute resolution to the courts other than those of Colombia and/or under a law other than that of Colombia? Under Colombian law, there might be two approaches to this question. Since the issue remains largely unchallenged, none of the approaches has been reviewed by Colombian courts and therefore, there is currently no certainty as to which position would prevail. The first approach is to conclude that it will be admissible, under Colombian law, that the parties to a shareholders agreement agree on an applicable law different from Colombian law and non-colombian courts for purposes of adjudication, regardless of the location where the agreement was concluded, the obligations contained therein, the type of rights and interests affected by it, their place of performance or any other criteria that may be relevant. The second approach is to conclude that it will only be admissible, under Colombian law, that the parties to a shareholders agreement agree on an applicable law different from Colombian law and non-colombian courts for purposes of adjudication, when (i) the law expressly allows the parties to agree to do so or (ii) when it is not mandatory to apply Colombian law. 6

With regard to (i) above, pursuant to article 2 of Law 315, 1996, if the parties expressly agree on international arbitration, they are free to choose a foreign applicable law and a foreign seat of arbitration, regardless of the location where the agreement was concluded, the obligations contained in it, the type of rights and interests affected by it, their place of performance or any other criteria that may be relevant. With regard to (ii) above, by way of example, pursuant to article 20 of the Colombian Civil Code, if any type of agreement is concluded in a foreign country but it refers to goods located in Colombia and (i) it has legal effects in Colombia, (ii) must be performed in Colombia, or (iii) affects the rights and interests of the Colombian State, the law governing such agreement will be Colombian law, regardless of what the parties have expressly provided in the agreement. Additionally, pursuant to article 869 of the Colombian Commercial Code, if any type of agreement is concluded in a foreign country, the applicable law to that agreement would be the law of the place where it will be performed, regardless of what the parties have expressly provided in the agreement. Therefore, if a shareholders agreement, even it was concluded outside Colombia, will be performed in Colombia, it will be subject to Colombian law. Since the lex loci solutionis provided for in said articles is a mandatory rule under Colombian law, in the abovementioned cases, the parties choice of a foreign law and foreign courts would be deemed ineffective and would not prevent the application of Colombian law and adjudication by Colombian courts. 18. Is it admissible for a shareholders agreement to include an arbitration clause with seat outside Colombia and/or under a law other than that of Colombia? A distinction must be made between domestic and international arbitration. Under Colombian law, arbitration is considered domestic when it does not meet the legal requirements to be considered international. In turn, pursuant to article 1 of Law 315, 1996, arbitration is considered international when the following two conditions are met: (a) the parties involved in the dispute have expressly agreed on international arbitration; and (b) one of following elements regarding the international nature of the agreement is met: (i) (ii) (iii) the parties, when concluding the arbitration clause, have their domiciles in different states; substantial parts of the obligations of the agreement will be performed outside the state in which the parties have their principal domicile; the parties agreed that the seat of arbitration will be outside the state in which the parties have their domiciles; 7

(iv) (v) the parties expressly agreed that the subject matter of the arbitration clause involves the interests of more than one state; or the dispute affects the interests of international trade. Based on the above, if the arbitration clause contained in the shareholders agreement provides for domestic arbitration, the same answer to question No. 17 above is applicable. Conversely, if the arbitration clause contained in the shareholders agreement provides for international arbitration, pursuant to article 2 of Law 315, 1996, the parties to the agreement are free to choose a foreign applicable law and a foreign seat of arbitration, regardless of the place where the agreement was concluded, the obligations contained in it, the rights and interests affected by it, their place of performance or any other criteria that may be relevant. 8