In a technology company, the shareholders’ agreement is often signed in a hurry, alongside the round, and then filed away. It is put to the test years later, when a founder leaves, a shareholder wants to sell, or a buyer offers to acquire the whole company. What protects the company on that day depends less on how the agreement is drafted than on the document in which each right was written.
What the law requires
What the law allows the parties to agree. In the stock corporation, Article 198 of the General Law of Commercial Companies (Ley General de Sociedades Mercantiles) allows shareholders to agree on options to buy and sell shares: the tag-along right (selling only if the buyer also acquires part of the other shareholders’ shares), the drag-along right (requiring another shareholder to sell on the same terms when an offer is accepted), call and put options at a fixed or determinable price, and subscription commitments. It also allows agreements on the right of first refusal and on the exercise of voting rights. The Securities Market Law (Ley del Mercado de Valores) reproduces that list for the S.A.P.I. (investment promotion stock corporation, sociedad anónima promotora de inversión) and adds a covenant exclusive to that form: the non-compete obligation, limited in time, subject matter, and territory, for no more than three years (Article 16, section VI, subsection a).
The limit of these agreements. Both laws end with the same rule: these agreements are not enforceable against the company, except by court order. That is why the company is not required to disregard a vote cast in breach of the agreement or to refuse to record a transfer in the share register, and a breach is claimed between the parties, as damages or as a contractual penalty.
The contractual penalty. The parties may set a penalty for breach, but they then cannot also claim damages (Article 1840 of the Federal Civil Code, Código Civil Federal), and the penalty may not exceed the principal obligation in value or amount (Article 1843). In commercial matters, the non-breaching party chooses between demanding performance and demanding the penalty; pursuing one remedy extinguishes the other (Article 88 of the Commercial Code, Código de Comercio).
What is enforceable against the company. Whatever is set out in the bylaws: in the S.A., a restriction on share transfers subject to board approval (Article 130 of the General Law); in the S.A.P.I., the list in Article 13 of the Securities Market Law, which includes restrictions of any kind on transfers, grounds for exclusion, non-voting or veto shares, and tie-breaking mechanisms. The S.A.P.I. may also acquire its own shares with prior board approval (Article 17), which provides a basis for employee stock plans and for the orderly exit of a shareholder.
Ownership of the software. A transfer of economic rights under copyright must be in writing or it is void (Article 30 of the Federal Copyright Law, Ley Federal del Derecho de Autor). If a founder developed the code before the company was incorporated, the shareholders’ agreement does not replace the assignment agreement.
What to do and by when
- Before signing, sort each clause into two columns: what must be enforceable against the company and third parties, which goes into the bylaws, and what binds only the parties, which goes into the agreement.
- If the non-compete clause is for an S.A.P.I., limit it to three years or less and define its subject matter and territory. Outside the S.A.P.I., there is no such express statutory term and the clause must be justified on other grounds.
- Design the founder’s exit with call options at a determinable price and, in an S.A.P.I., with the share buyback under Article 17.
- Set a contractual penalty proportionate to the obligation and decide now whether to waive claims for additional damages.
- Formalize in writing the assignment of the software and trademarks that the founders contributed before the company was incorporated.
- If the agreement modifies voting or transfer rights, amend the bylaws at the same shareholders’ meeting that approves the round.
Recommendations to mitigate risk
The main risk is discovering, exactly when it is most needed, that the agreed right cannot be enforced against the company. A founder’s sale made in breach of the right of first refusal in the agreement can be recorded as if nothing had happened, leaving the company with only a damages claim between private parties. A five-year non-compete in an S.A.P.I. exceeds the statutory limit and is open to challenge, while software without a written assignment does not belong to the company, something the investor will spot in due diligence.
When neither the bylaws nor the agreement provide for what happens if the shareholders cannot reach agreement, the deadlock ends up before a judge and the business is stalled in the meantime. In the S.A.P.I., the bylaws may set mechanisms for cases of disagreement (Article 13, section IV, of the Securities Market Law), and the agreement may define the dispute resolution method between the parties.
Self-assessment
Answer yes or no about your own company.
- Are the share transfer restrictions you agreed on also set out in the bylaws?
- Does your shareholder non-compete clause respect the three-year limit of the Securities Market Law?
- Does the agreement provide for how a founder exits and how that founder’s shares are valued?
- Is the agreed contractual penalty proportionate to the principal obligation?
- Is there a written assignment of the rights to the software that the founders developed before the company was incorporated?
- Do the shareholders know that the company is not required to disregard a vote cast in breach of the agreement?
How we approach it at LEXURE
We draft the shareholders’ agreement and the bylaw amendment as a single design, in which each right is placed where it produces the intended effect. We also review the chain of title to the software and trademarks and calibrate penalties and exit mechanisms. We document what can be required of the company and what only between the parties, so that founders and investors negotiate on rules that can be enforced.
If you are about to sign or renegotiate a shareholders’ agreement, schedule a diagnostic meeting with us before signing.
Legal basis
- General Law of Commercial Companies (Ley General de Sociedades Mercantiles), Articles 129, 130, and 198. Current text (opens in a new tab)
- Securities Market Law (Ley del Mercado de Valores), Articles 13, 16, section VI, and 17. Current text (opens in a new tab)
- Federal Civil Code (Código Civil Federal), Articles 1840 and 1843. Current text (opens in a new tab)
- Commercial Code (Código de Comercio), Article 88. Current text (opens in a new tab)
- Federal Copyright Law (Ley Federal del Derecho de Autor), Article 30. Current text (opens in a new tab)
This note is for information only and describes the law in force on the verification date. It is not legal advice on a specific matter. It is a translation of the Spanish original: Mexican law is published in Spanish, and the official Spanish texts prevail.