ABSTRACT

Shareholders' Agreements are contractual devices to manage tensions among shareholders of a corporation. These agreements have a wide scope related to shareholders' interest. Nevertheless, before subscribing a shareholder agreement is important to determine the requirements to make it enforceable. This issue has been addressed in the last twenty years by state corporate statutes following the Model Business Corporation Act and the Delaware General Corporation Law and in different court decisions. Today, shareholders' agreements will be enforced according to the terms defined by the parties unless the agreement injures non-participating shareholders, third parties or is against public policy.

Key words: shareholders' agreements, enforcement, close corporations, internal affairs doctrine, minority shareholders.

RESUMEN

Los acuerdos de accionistas son mecanismos de tipo contractual que permiten resolver las tensiones que existen entre los accionistas de una sociedad. Estos acuerdos de naturaleza contractual tienen un amplio alcance relacionado con los diferentes intereses y necesidades de los socios. En todo caso, antes de suscribir un acuerdo de accionistas es muy importante determinar cuáles son los requerimientos que harán el mismo aplicable y ejecutable. Este tema ha sido considerado en los últimos 20 años por las regulaciones de los diferentes estados en los Estados Unidos de América tomando como base la Ley Tipo de Sociedades y la Ley de Sociedades del estado de Delaware. En la actualidad, los acuerdos de accionistas serán objeto de aplicación, de conformidad con los términos recogidos por las partes, a menos que el acuerdo afecte a los accionistas que no participen en el mismo, a terceras partes o el mismo resulte contrario al orden público. El presente artículo es un producto del proyecto Interpretación y Aplicación del Derecho Privado del grupo de investigación en derecho civil y comercial de la Facultad de Ciencias Jurídicas de la Pontificia Universidad Javeriana.

Key words: acuerdos de accionistas, sociedad cerrada, accionistas minoritarios, implementación, aplicación.

INTRODUCCIÓN

Closely held corporations are the most common corporate forms of organization¹. Most of the enterprises in the United States are closely held corporations². The close corporation category includes a whole variety of enterprises like familyowned business, high-tech start-ups, small firms and mature publicly held corporations, post-leveraged buyouts³. Closely held corporations are corporations with concentrated ownership⁴.

Shareholders of close corporations, either small, family-owned or big in assets and structure, ordinarily enter into different kinds of agreements to regulate the most important relations of the corporation⁵. Shareholders' agreements could include a whole variety of issues, like voting of shares for the election of directors, who are to be officers of the corporation, long-term employment for some of the participants in the agreement and salaries, a power to veto corporate decisions, circumstances to declare dividends and methods of resolving disputes, among others⁶.

In the past, the norms in state statutes were established mostly to protect shareholders and investors in publicly held corporations where management and ownership are divided and the mechanisms established address this reality⁷. At the same time, court decisions were uncertain and confusing about the validity and enforceability of shareholders' agreements in the context of close corporations⁸. Decisions were normally hostile to contracts which modified the classic structure of functions and roles among shareholders, directors and officers⁹. This situation has changed in recent years.

Modern state statutes contain provisions regulating shareholders' agreements validating their celebration and implementation¹⁰. In addition, modern court decisions have shown a favorable view toward shareholders' agreements, considering them enforceable and valid¹¹. Under this new trend, the legal system recognizes the existence of fundamental differences in structure, functions and necessities between publicly-held corporations and closely-held corporations¹².

This document explores the requirements for enforcement of shareholders' agreements in the context of the close corporation. Chapter II will present a basic approach to the internal affairs doctrine and the concept of close corporation. Chapter III will explain the nature and basic functions of shareholders' agreements. Chapter IV will explain the classes of shareholders' agreements and the issues which are normally covered in them. Chapter V will consider the evolution process for the enforcement of shareholders' agreements, the statutory requirements for enforcement in the Model Business Corporation Act and the Delaware General Corporation Law and the issues which concern judges when enforcing these agreements.

AN APPROACH TO UNITED STATES CLOSE CORPORATIONS

A. Internal affairs doctrine

The American Corporate System is state-centered¹³. Every state offers a specific set of rules for the business interested in incorporation¹⁴. In this manner, corporate statutes could be viewed as state by-products and the private corporations as their consumers.¹⁵ This system creates a competition among the states to get the companies and, consequently the fees and taxes which come with incorporation¹⁶.

The question to be answered is which state's law is applied to the corporation. Two different subjects must be separated in this matter: the internal affairs of the corporation and the business of the corporation¹⁷. The internal affairs of the corporation refer to the relationship among the corporation and its current officers, directors, and shareholders¹⁸. The business of the corporation is considered the relationship among the corporation and its clients, creditors and workers¹⁹. For the scope of this document, the question will focus on the internal affairs issue.

The internal affairs of the corporation are covered by the Internal Affairs Doctrine²⁰. Under this doctrine, courts look to the law of the state of incorporation in dealing with a corporation's internal affairs²¹. Therefore, businessmen decide the rules for internal affairs by choosing the state of incorporation²². At the same time, this doctrine guarantees that other states will recognize corporations incorporated in another state and that their courts will apply the law of the state of incorporation in matters of internal affairs²³.

The United States Supreme Court stated in Edgar v. MITE Corp²⁴. the usefulness of this doctrine as follows: "The internal affairs doctrine is a conflict of laws principle which recognize that only one State should have the authority to regulate a corporation's internal affairs ... because otherwise a corporation could be faced with conflicting demands...".

In this context, this document will consider mainly two statutes in the United States: The Model Business Corporation Act [Hereinafter MBCA] and the Delaware General Corporation Law [Hereinafter D.G.C.L.]. The MBCA was developed by the American Bar Association Section of Business Law, Committee on Corporate Law; most states based their rules on this statute²⁵. On the other hand, the D.G.C.L. has become the preeminent American corporate law jurisdiction, playing a dominant role in the United States corporations system²⁶.

B. Concept of close corporation

The concept of 'close corporation' seems difficult to reduce to an all-purpose description²⁷. In fact, it is possible to find a variety of definitions describing what it is²⁸. The scope of the concept will depend on the statute of the state²⁹, the court which has decided the case³⁰ or the author's opinion³¹. Nevertheless, the definition of a 'close corporation' normally includes three different aspects of the structure of a corporation³².

The first aspect is related to an objective feature of shareholders. The objective characteristic is the number of shareholders³³. Normally, a small number of shareholders are the owners of the complete stock in close corporations³⁴. The D.G.C.L. and the MBCA include a limit in the number of shareholders for a corporation to be considered 'close'³⁵. This feature is a consequence of the fact that participants in close corporations normally are familiar or have other personal relations in addition to the business relationship³⁶.

The second aspect is related to a feature of the shares. In the case of a close corporation, there is a lack of an organized market for the trade of the shares³⁷.

The free transferability of shares common to public corporations is not present in close corporations³⁸. In close corporations, there is a restriction in the ability of investors to alienate their shares³⁹. Shareholders control the transfer of shares in a way that unwanted interested investors cannot participate in the company⁴⁰.

The third aspect considerers the relation between shareholders and directors concerning ownership and management. In close corporations exists a close identity between shareholders and managers, which contrast radically with public corporations wherein ownership and control are clearly separated⁴¹. The close identity comes from the fact that the same people both manage and bear the risk of investment⁴². Shareholders, directors and officers of the corporation are normally the same individuals⁴³. Under these circumstances, it could be very common to find in close corporations that earnings of the corporation are distributed among the shareholders not as dividends but as a salary⁴⁴.

For the purpose of this document, close corporations are those whose stock is not publicly traded.

NATURE AND FUNCTIONS OF SHAREHOLDERS' AGREEMENTS

A. Nature of shareholders' agreements: a contractual device

A corporation from the economic perspective has been described as a "firm"⁴⁵. Corporations are for-profit-seeking enterprises composed by persons and assets and organized by rules⁴⁶. The rules could be determined by i) law, ii) contracts or other forms or agreements, iii) corporate organs and officials and, iv) market forces⁴⁷. Shareholders' agreements are part of the rules determined by "contracts or other forms of agreements".

A shareholder agreement is a contract⁴⁸. The object of this contract is to define the scope and extent of the relationships among the shareholders and between the shareholders and the corporation⁴⁹. The extent of the object of the contract will depend on flexibility of the legislation and public policy constraints on the participants.

Additionally, from a contractual approach, the close corporation is gaps⁵⁰. Existing rules do not have an answer to all the different contingencies that the corporation will face in the future⁵¹. In this context, shareholders' agreements pretend to avoid in advance some of the most important problems for a close corporation using a before-the-fact perspective⁵². Shareholders' agreements give flexibility to the participants in the corporation, bearing in mind the fact that the problems in close corporations are quite different from those in public corporations⁵³.

Also, legislation has provided in recent years flexibility for the participant in business⁵⁴. The legislation has transformed from less prescriptive rules to more enabling rules⁵⁵. In this manner, shareholders can reach almost any kind of agreement⁵⁶. Shareholders have a wide road to define the terms of their relationship and avoid other mechanisms that come into play⁵⁷.

B. Functions of shareholders' agreements: a way to solve tensions among shareholders

The central problem in the corporate governance structure of close corporations is how to find the most reasonable degree of adaptability and protection from the opportunism of either the majority or minority shareholders⁵⁸. At the same time, shareholders in close corporations require flexibility for their business and personal interests⁵⁹. Shareholders' agreements are the most successful device to mitigate the application and effect of traditional corporate rules in the context of close corporations⁶⁰. Besides, shareholders' agreements could be a very helpful instrument in the environment of international commercial transactions and corporations with shareholders in different nations⁶¹.

1. PROTECTION FOR MINORITY SHAREHOLDERS IN CLOSE CORPORATIONS

A close corporation is the perfect environment for majority opportunism⁶². Majority opportunism is possible if the following aspects are combined together in a close corporation⁶³: i) application of the majority rule⁶⁴; ii) separation of functions among shareholders, directors and officers; iii) lack of guaranteed employment or dividend rights for shareholders; and iv) impossibility to apply the unilateral dissolution mechanism.

In a close corporation, the traditional norms of corporate governance structure plus the lack of a public market for shares⁶⁵ leave the minority shareholder vulnerable to the majority.⁶⁶ Under the majority rule, the relationship between majority-minority shareholders might finish in what is called a "freeze out/squeezeout" ⁶⁷. In a freeze out/squeeze out, a majority shareholder uses his/her control over the corporation against a minority shareholder in a way that the latter could not participate in the management and earnings of the corporation⁶⁸.

Therefore, a shareholder agreement may be a key instrument to protect minority shareholders from the majority⁶⁹. The agreement's primary goal is to give the minority shareholder participation in the management of the corporation or a more important role in the decision-making process⁷⁰. In this case, the majority is willing to share some of its control in order to encourage people who, under normal circumstances, would not buy a minority interest⁷¹.

2. BALANCE AMONG SHAREHOLDERS WITH SIMILAR POWER AND INTERESTS

In a close corporation, two or more not controlling shareholders could constitute a majority whose primary objective is to assure that the parties in the agreement will make decisions concerning the corporation together⁷². In fact, no shareholder has majority over the other shareholders by him/herself. The corporation has a control group composed of a small number of shareholders instead of a controlling shareholder⁷³. In this case, the existence of equilibrium among shareholders is a feature of the business agreement⁷⁴.

Shareholders want to maintain the control of the corporation regardless of the changes in the future. At the same time, shareholders in a close corporation expect to have employment, role management and return on their investment⁷⁵. In addition, most of the shareholders in a close corporation have their wealth invested in the corporation⁷⁶. Therefore, the decisions made by the corporation could affect each shareholder significantly⁷⁷.

In this context, shareholders will implement specific devices to protect their investment⁷⁸. A very useful solution for shareholders is to have in advance a contractual device, applicable when it is needed to solve differences among shareholders⁷⁹. The contractual device solution could work really well in the closed corporation environment because there is a small number of shareholders in the negotiation process⁸⁰.

CLASSES AND ISSUES COVERED BY SHAREHOLDERS' AGREEMENTS

The issues normally covered by shareholders' agreements are related to those which regulate shareholder actions and those which control director functions⁸¹.

A. Shareholders' agreements concerning shareholder decisions

The agreements which regulate shareholder actions cover issues agreed in advance among the participants as to how to act in the exercise of their rights as shareholders⁸². In the group of shareholder actions we find those called "shareholding" or "pooling agreement", [this is a simple contract providing that the shareholders will vote their shares as a unit in the election of directors and other matters]⁸³ proxy agreement, [this is a contract that creates irrevocable proxies which take away the shareholders' power to vote their shares and vest that power in one or more of the shareholders or in other persons]⁸⁴ and voting trust [this is a contract which transfers legal title of the share to trustees, who vote the shares in accordance with the terms of the trust instrument.]⁸⁵.

B. Shareholders' agreements concerning director decisions

The agreements concerning directors' functions are about management of the corporation. Management in a close corporation usually depends on shareholders' will⁸⁶. The concept of an independent board of directors separated from the shareholders is a fiction that does not apply in the close corporation context⁸⁷. Therefore, shareholders celebrate agreements to adapt the traditional corporate rules according to their needs⁸⁸. The new rules determine who is to have control of the corporation and how that control is to be exercised⁸⁹.

The aspects included in these agreements could determine many different issues which normally are functions of the board of directors. Many agreements contain provisions like: i) designating corporate officers and determining their compensation and tenure;⁹⁰ ii) undertakings by shareholders assuring permanent employment by corporation;⁹¹ iii) agreements providing veto arrangements;⁹² iv) agreements controlling dividend policy or providing for distribution of corporate assets or profits (agreements could include a prohibition of declaring dividends for a limited period of time or under specific circumstances, a shareholder veto power to declare dividends, a provision which provides that not dividends could be declared until the corporation pay a loan);⁹³ v) inclusion of arbitration clauses for settling a dispute among shareholders;⁹⁴ vi) agreements governing dissolution, buyouts and other remedies for deadlock;⁹⁵ vii) agreements about transfer restrictions among the shareholders and the corporation;⁹⁶ and viii) any other issue dealing with the relationship among shareholders or which governs the exercise of corporate powers and is not contrary to public policy⁹⁷.

ENFORCEMENT OF SHAREHOLDERS' AGREEMENTS

A. Enforcement of shareholders' agreements concerning shareholder decisions

1. EVOLUTION

In the U.S. courts, the enforcement of shareholders' agreements concerning issues normally in the power of shareholders has been an object of discussion⁹⁸. Most of the initial decisions of courts considered voting agreements invalid⁹⁹. The main two reasons for invalidating the agreements were i) the idea that the power to vote was treated as inseparable from the shares and ii) the idea that shareholders owe to the each other a duty to vote in the corporation meetings in the best interest of the corporation¹⁰⁰.

Today, the trend toward the validity and enforcement of shareholders' agreements concerning shareholder issues has a most positive perspective in courts¹⁰¹. The enactment of statutes expressly authorizing this kind of agreement has been the best way to avoid discussion about the validity of shareholders' agreements concerning shareholder decisions¹⁰². The MBCA and D.G.C.L. provide specific rules for the enforcement of pooling agreements,¹⁰³ proxy agreements,¹⁰⁴ and voting trust¹⁰⁵.

2. STATUTORY REQUIREMENTS FOR ENFORCENT

i) Pooling agreements

Pooling agreements are contracts in which shareholders agree to vote their shares in a specific manner.¹⁰⁶ Pooling agreements could include a variety of issues relating to shareholders' needs. Normally, pooling agreements include:¹⁰⁷ i) agreement to vote shares for directors; ii) agreement giving voting power disproportionate to shareholdings; or iii) agreement to vote shares so as to effectuate a particular corporate policy. Pooling agreements regulating these issues have been considered lawful and enforceable.¹⁰⁸ Nevertheless, courts have invalidated agreements when a shareholder sells his vote or compromises voting power under considerations of some personal benefit¹⁰⁹.

The statutory requirements for pooling agreements in the MBCA and DGCL are: i) Two or more shareholders must participate in the agreement (shareholders part of the agreement could be a minority, a majority or all of them, the requirement is quantitative and not qualitative);¹¹⁰ ii) the agreement must be in writing;¹¹¹ and iii) the agreement must be signed by all the participating shareholders¹¹².

ii) Proxy agreements

Under the proxy agreement, the pooling or voting agreement goes one step further¹¹³. Besides the existence of an agreement covering how the shareholders are suppose to vote certain matters, shareholders create irrevocable proxies which vest the power to vote their shares in one or more persons, who could be either shareholders or other persons¹¹⁴. The reason for the further step is a way to secure that the shares will be voted according to the terms of the agreement without delays and uncertainties¹¹⁵.

Historically, the idea of an irrevocable proxy has been questioned¹¹⁶. However, statutes have established the requirements for an irrevocable proxy to be enforceable¹¹⁷. The requirements solve clearly many of the questions used in the past to challenge irrevocable proxies¹¹⁸. The statutory requirements are: i) the proxy must be in writing;¹¹⁹ ii) the proxy must be signed or must contained information from which it can be determined that the writing document was authorized by the shareholder;¹²⁰ iii) the proxy will have a time limit, unless it provides for a longer period;¹²¹ iv) the proxy is irrevocable if it states that it is irrevocable and it is coupled with an interest;¹²² and v) the writing document or the electronic transmission is received by the corporation¹²³.

iii) Voting trust

Under this method, shareholders transfer their shares to trustees, who vote the shares in accordance with the terms of the agreement¹²⁴. Therefore, the trustee becomes the legal owner of the shares but usually the former shareholder retains economic benefits of the shares¹²⁵. Generally, the trustee gives to the former shareholder "voting trust certificates" as evidence of the economic benefit of the shares¹²⁶. Provisions in a voting trust could regulate any material and procedural issues concerning shareholders' decisions¹²⁷.

The statutory requirements for voting trust agreements in the MBCA and D.G.C.L. are: i) One or two or more shareholders must participate in the agreement (there is not a quantitative requirement for shareholders to enter in a voting trusts, [e.g. one, two, all] the only requirement is qualitative: being a shareholder of the corporation);¹²⁸ ii) the agreement must be in writing;¹²⁹ iii) the agreement must be signed;¹³⁰ iv) the transfer of the shares to the trustee or trustees by the shareholder;¹³¹ v) the voting trust have a statutory time limit¹³² under the MBCA¹³³ and a contractual time limit under D.G.C.L¹³⁴. (this is an important difference between the two statutory rules); and vi) the corporation must be informed of the voting trust agreement but the two statutory models have different rules for this process¹³⁵.

The MBCA requires the trustee to prepare a list and "deliver copies of the list and agreement to the corporation principal office"¹³⁶. In addition, this statute states that the voting trust "becomes effective on the date the first shares subject to the trust are registered in the trustee's name"¹³⁷. On the other hand, the D.G.C.L. requires the filling of a "copy of the agreement in the registered office of the corporation" and the copy shall be available to the inspection of any stockholder of the corporation¹³⁸.

Finally, the MBCA and the D.G.C.L. establish clearly that the requirements of the voting trust are not applicable to other kinds of agreements which could exist without interference of the special rules for voting trust¹³⁹. The reason for this provision is related to judicial decisions which in the past left some uncertainties about the validity of shareholders' voting agreements different from voting trust agreements¹⁴⁰.

B. Enforcement of shareholders' agreements concerning director decisions

1. EVOLUTION

Historically, shareholders' agreements concerning director decisions were held invalid by courts¹⁴¹. The arguments to invalidate shareholders' agreements were:¹⁴² i) shareholders' agreements violate a statute (an article or a section), in this case for instance, the fact that directors shall manage the affairs of the corporation; ii) the fiduciary duties of directors to exercise their best judgment for the benefit of the corporation and the shareholders as a whole may be disregarded by the agreement; and iii) the agreement is unfair and fraudulent to shareholders who do not participate in it.

On different occasions, courts held that shareholders' agreements were void if they regulated the management and operation of the corporation in a way different from what had been established by the corporation statute.¹⁴³ The concept behind these holdings was that incorporation and limited liability were special features given by the state¹⁴⁴. Therefore, if shareholders wanted to enjoy these privileges, the condition was to follow strictly the traditional roles of corporation management and operation¹⁴⁵.

A good example of courts unfavorable view of shareholders' agreements is the case McQuade v. Stoneham¹⁴⁶. In this case, Defendant Charles Stoneham, the majority shareholder of the National Exhibition Company, also called the Baseball Club (New York Nationals or "Giants") sold minority stock interest in the company to defendant John J. McGraw and to plaintiff Francis X. McQuade¹⁴⁷. The corporation's business was the New York Giants baseball team and McGraw was the team's manager¹⁴⁸. As part of the transaction, Stoneham, McGraw and McQuade entered into a shareholder agreement in which they agreed that they would use their best endeavors for the purpose of continuing as directors and officers of the corporation,¹⁴⁹ decided what their salaries would be,¹⁵⁰ and decided that not changes in corporate structure or policy would occur without their unanimous consent¹⁵¹. Nine years later, Stoneham and McGraw breached the agreement¹⁵². The board of directors controlled by Stoneham discharged McQuade as an officer and later on he was not reelected as Director¹⁵³. McQuade was dropped from his post because he antagonized the dominant Stoneham, not for misconduct¹⁵⁴.

McQuade sued Stoneham and McGrew for breach of the shareholder agreement¹⁵⁵. The New York Court of Appeals ruled for defendants Charles Stoneham and John J. McGraw¹⁵⁶. The court concluded that it was possible to celebrate an agreement among shareholders as to determine who would be directors of the corporation¹⁵⁷. But the court concluded that an agreement which contractually restricted the director's discretion and precluded them from acting in the best interest of the corporation and all shareholders was against public policy¹⁵⁸. A shareholder agreement which sterilized the board of directors of a corporation was not enforceable¹⁵⁹.

In recent years courts have shown a favorable trend in the enforcement of shareholders' agreements in close corporations concerning control over management¹⁶⁰. This trend recognized the differences between publicly-held business and closely-held corporations. A good example of courts favorable view of shareholders' agreements is the case Zion v Kurtz¹⁶¹.

In this case, Zion and Kurtz were the two shareholders of a Delaware Corporation called Lombard-Wall Group, Inc¹⁶². As part of the transaction in which Zion's bought a minority interest in Lombard-Wall Group ("Group"), the two shareholders entered into a shareholder agreement providing that the corporation would not engage in any business or activities without Zion's consent¹⁶³. Despite this agreement, Kurtz engaged the corporation in certain activities without Zion's consent¹⁶⁴. Zion then sought declaratory and injunctive relief against Kurtz¹⁶⁵.

The shareholder agreement provided that it should be governed and enforced in accordance with the laws of the State of Delaware¹⁶⁶. Delaware legislation allowed agreements in which shareholders of close corporations manage the business and affairs of the corporation, rather than the board of directors¹⁶⁷. Nevertheless, the Delaware statute required the articles of incorporation to reflect the agreement about management by shareholders¹⁶⁸. In the present case, the articles of incorporation did not reflect the existence of the shareholder agreement celebrated between Zion and Kurtz¹⁶⁹.

The Court stated that the articles of incorporation could be reformed to include provisions restricting directors' authority¹⁷⁰. At the same time, the court stated that the defendant (Kurtz) had the responsibility to file the statutory documents, so the lack of fulfillment of formal requirements could not be taken as a reason to not enforce the agreement¹⁷¹. Most importantly, the conclusion of the court stated that the shareholder agreement between Zion and Kurtz was enforceable. The court considered the following reasons to support its decision:¹⁷² i) there were not intervening rights of third parties; ii) the agreement was not prohibited by statute, in other words, this kind of agreement was permitted; and iii) the notice device could not be applied to protect a party (Kurtz) who agreed in advance to this limitation in the decision-making process of the corporation.

Today, the pattern is that shareholders' agreements could modify the traditional rules of corporate control in the corporation¹⁷³. Courts are aware of the reality of close corporations as a different structure from publicly held corporations¹⁷⁴. This reality has been reinforced by special legislation enacted exclusively to close corporations¹⁷⁵.

2. STATUTORY REQUIREMENTS FOR ENFORCEMENT

i) Model Business Corporation Act

Section 7.32 of the MBCA added in 1991 answer many of the challenges to the validity of shareholders' agreements.¹⁷⁶ The requirements for a shareholder agreement to be enforceable under the MBCA are:

• The agreement shall be set forth in the articles of incorporation,¹⁷⁷ or in the bylaws,¹⁷⁸ or in a written agreement signed by the shareholders; ¹⁷⁹
• The agreement must be in writing and be approved or agreed to by all the shareholders of the corporation at the moment the agreement is close;¹⁸⁰
• The agreement must be unanimous;¹⁸¹
• The agreement shall be known by the corporation;¹⁸²
• The liability for the acts or omissions imposed by law on directors shall be imposed to upon the person or persons in whom the powers of the board of directors are invested, and the directors will be relieve of their responsibilities to the extent that the discretion of powers are limited by the agreement;¹⁸³
• The corporation must not become a publicly-held corporation;¹⁸⁴ and
• The agreement will be valid for 10 years, unless other period of time is set in the agreement¹⁸⁵.

ii) Delaware General Corporation Law

The D.G.C.L. 8 §350, §351 and §354 regulate shareholders' agreements and the requirements to be enforceable¹⁸⁶. The requirements for a shareholder agreement to be enforceable under the D.G.C.L. are:

• The agreement shall be set forth in the certificate of incorporation¹⁸⁷ if the purpose is to establish direct shareholder management of the corporation rather than by directors,¹⁸⁸ or a written agreement signed by the different parties participating in the agreement if the purpose of the agreement is to restrict discretion of directors; ¹⁸⁹
• The agreement must be unanimous if the purpose is to establish direct shareholder management of the corporation,¹⁹⁰ or must be approved by a majority of the outstanding stock entitled to vote if the purpose of the agreement is to restrict discretion of directors;¹⁹¹
• The agreement shall relieve directors and impose upon the stockholders parties of the agreement the liability for managerial acts or omissions;¹⁹² and
• The corporation must be a close corporation¹⁹³.

C. Issues that still worry judges about enforcement of shareholders' agreements

The common law has followed the trend included in statutes about respecting and enforcing the agreements reached between the participants in a close corporation¹⁹⁴. The reasoning is that if the statutes provide room to depart from traditional standards of management, the state policy is permissive in departing from the traditional model¹⁹⁵. Shareholders' agreements should be valid and enforceable, so long as these agreements do not affect other shareholders, creditors, or the public¹⁹⁶. In this context, the roles of unanimity, third parties interest and public policy have become very important to control the enforcement of shareholders' agreements¹⁹⁷.

1. THE ROLE OF UNANIMITY

In shareholders' agreements, the importance of unanimity is related to the issue of judicial scrutiny¹⁹⁸. For those shareholders' agreements which do not require unanimity, enforcement will require greater judicial scrutiny¹⁹⁹. In contrast, shareholders' agreements which require unanimity will initially have a more positive approach from the judge²⁰⁰. The idea behind this difference of treatment is the possibility of prejudice to nonparticipating shareholders and the interest of the corporation²⁰¹.

The considerations in support of unanimity are: i) all shareholders should decide about the corporation and their assets;²⁰² ii) the possibility of injury for minority shareholders is reduced if all shareholders participate in the agreement;²⁰³ and iii) shareholders' agreements can affect the structure and operation of the corporation and shareholders' obligations and rights²⁰⁴. Nevertheless, even unanimous shareholders' agreements will not be enforceable if the provisions are against creditors or public policy²⁰⁵.

If shareholders' agreements are not unanimous, courts will place a particular interest in the negative effects of non-participating shareholders²⁰⁶. Besides, depending on the court position, even "potential" risks to non participating shareholders could be a sufficient reason to strike down shareholders' agreements.

2. THE ROLE OF THIRD PARTIES

Third parties could be creditors, the state and all others who are not part of the agreement but have some kind of interest in the corporation's development. The private ordering recognized that shareholders' agreements will be limited in consideration of the effects on third parties²⁰⁷. Nevertheless, the effects of shareholders' agreements on third parties are difficult to predict in the long-run and the effects cannot be determined completely by an ex ante mechanism²⁰⁸. In this manner, the limit will be placed in those cases where any part of the agreement injures third party rights²⁰⁹. Depending on the court position, a judge could focus principally on the effects flowing from the contract²¹⁰ or upon its purpose (even if the agreement harmed no one)²¹¹, when determining the enforceability of shareholders' agreements.

3. THE ROLE OF PUBLIC POLICY²¹²

A transaction is to be enforced according to the terms negotiated by the parties²¹³. The enforcement principle is based in the fact that fully informed parties are the best judges of their own utility or interests in the bargain²¹⁴. Therefore, agreements are valid unless they go against the interests of society²¹⁵. The rule is that contracts will not be enforced if they go against public policy²¹⁶.

In this manner, the mandatory rule prevails over the private ordering²¹⁷. Classical examples are when the legal system will not enforce bargains based on theft, fraud or duress²¹⁸. Initially, the sources of public policy will be found in constitutions, statutes, regulations and ordinances of a specific jurisdiction²¹⁹. In this case, the explicit rules facilitate the job of courts by clearly pointing out which agreements are not enforceable²²⁰. But in practice, courts are one of the most important sources of public policy²²¹.

In fact, courts find and declare the public policy of the jurisdiction²²². Courts judge contracts according to the time and place of a specific jurisdiction²²³. In this context, the concept of public policy is very sensitive to the passage of time²²⁴. Nevertheless, courts are conscious of the problems of abuse when using the rule of public policy²²⁵.

The Restatement (Second) of Contracts suggests a specific process when evaluating the conf lict between public policy and private ordering²²⁶. The Restatement considers that an agreement should not be enforced only if the interest in its enforcement is clearly outweighed by the interest in not enforcing the contract²²⁷.

The Restatement suggests different issues that should be analyzed when weighing public policy against the enforcement of a contract:²²⁸ i) the parties' justified expectations; ii) the forfeiture that would result from non enforcement; iii) any public interest in enforcing the provision; iv) the strength of the policy against enforcement; v) the likelihood that a refusal to enforce the contract will further the policy; vi) the seriousness and deliberateness of the misconduct; and vii) the closeness of connection between the misconduct and the provision. In different decisions, courts have considered this factor-balancing analysis in the Restatement (Second) of Contracts²²⁹.

CONCLUSION

Modern state statutes and court decisions support the validity and enforcement of shareholders' agreements. In the past, these statutes and decisions have answered many questions which challenged the role of private ordering in the context of the closed corporations. Shareholders can change, in advance the structure, roles and functions in the shareholder-director-officer relationship of the close corporation. Nevertheless, shareholders' agreements in closed corporations still face important limits for enforcement. The main limits are the right of the non-participating shareholders and third parties and the role of public policy. The limits must be defined and measured by courts on a case-by-case basis.

BIBLIOGRAFÍA

A. Statutes

Model Business Corporation Act (MBCA) §7.22, §7.30, §7.31, §7.23 and Official Comments Sections 7.22, 7.31 and 7.32.        [ Links ]

Delaware General Corporate Law (DGCL) §212, §213, §342, §344, §350, §351, and, §354.        [ Links ]

B. Books

CHARLES R.T. O'KELLEY JR. & ROBERT B. THOMPSON, Corporations and other business associations (Aspen Publishers 4th ed. 2003).        [ Links ]

F. HODGE O'NEAL & ROBERT B. THOMPSON, O'Neal and Thompson's Close Corporations and LLCs: Law and Practice Volume 1-2 (West 3rd Revised Edition 2005).        [ Links ]

FRANKLIN A. GEVURTZ, Corporation Law (West Group ed. 2000).        [ Links ]

JESSE H. CHOOPER, JOHN C. COFFEE, JR., RONALD J. GIBSON, Cases and materials on corporations, 711 (Aspen Publishers 5th ed. 2000).        [ Links ]

Committee of Corporate Laws, ABA Section of Business, Managing Closely Held Corporations, A Legal Guidebook, (2003).        [ Links ]

ROBERTA ROMANO, Foundations of Corporate Law (Foundation Press ed. 1993).        [ Links ]

C. Law reviews

CARLOS D. ISRAELS, The close corporation and the Law, 33 Cornell L. Q. 488 (1948).        [ Links ]

CHARLES R.T. O'KELLEY JR., Filling gaps in the close corporation contract: a transaction cost analysis, 87 NW. U. L. Rev. 216 (1992).        [ Links ]

DOUGLAS K. MOLL, Shareholder oppression in close corporations: the unanswered question of perspective, 53 Vand. L. Rev. 749 (2000).        [ Links ]

FRANK H. EASTERBROOK & DANIEL R. FISCHEL, Close corporations and agency costs, 39 Stan. L. Rev. 271 (1986).        [ Links ]

GEORGE D. HORNESTEIN, Stockholders' agreements in the closely held corporation, 59 Yale L. J. 1040 (1950).        [ Links ]

GEORGE J. SIEDEL, Close corporation law: Michigan, Delaware and the model act, 11 Del. J. Corp. L. 383 (1986).        [ Links ]

JAMES M. VAN VLIET JR. & MARK D. SNIDER, The evolving fiduciary duty solution for shareholders caught in a closely held corporation trap, 18 N. Ill. U. L. Rev. 239 (1998).        [ Links ]

JEFFREY N. GORDON, The mandatory structure of corporate law, 89 Colum. L. Rev. 1549 (1989).        [ Links ]

KERRY M. LAVALLE, Drafting shareholder agreements for the closely-held business, 4 DePaul Bus. L. J. 109 (1991).        [ Links ]

MARY SIEGEL, Fiduciary myths in close corporate law, 29 Del. J. Corp. L. 377 (2004).        [ Links ]

MELVIN AARON EISENBERG, The bargain principle and its limits, 95 Harv. L. Rev. 741 (1982).        [ Links ]

MELVIN AARON EISENBERG, Contractual freedom in corporate law; the structure of corporate law, 89 Colum. L. Rev. 1461 (1989).        [ Links ]

NORWOOD P. BEVERIDGE, JR., The internal affairs doctrine: the proper law of a corporation, 44 Bus. Las 693 (1989).        [ Links ]

ROBERT B. THOMPSON, The law's limits on contracts in a corporation, 15 J. Corp. L. 377 (1990).        [ Links ]

RALPH A. PEEPLES, The use and misuse of the business judgment rule in close corporation, 60 Notre Dame L. Rev. 456 (1985).        [ Links ]

SANDRA K. MILLAR, Minority shareholder oppression in the private company in the european community: a comparative of the German, United Kingdom and French "close corporation problem", 30 Cornell Int'l L. J. 381 (1997).        [ Links ]

STEVEN C. BAHLS, Resolving shareholders dissension: selection of the appropriate equitable remedy, 15 J. Corp. L. 285 (1990).        [ Links ]

D. List of cases

Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E. 2 d. 505 (1975)        [ Links ]

Edgar v. MITE Corp., 457 U.S. 624 (1982)        [ Links ]

Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559 (1918)        [ Links ]

McQuade v. Stoneham, 263 NY., 189 N.E. 324 (1934)        [ Links ]

Zion v. Kurtz, 50 N.Y. 2d 92, 405 N.E. 2d 681, 428 N.Y.S. 2d 199 (1980)        [ Links ]