The new Law on Reactivation of the Economy1 has added an important provision into the Law on Companies whereby shareholders in stock corporations are now able to execute agreements establishing conditions when trading their shares.  Although this type of agreements has been a common practice in Ecuador, the new rules will provide further clarity to this subject.

The rule allows shareholders to regulate a commercial relationship with other shareholders or with third parties without the company's intervention and, therefore, to establish conditions for purchases or sales of shares. A legal concept such as establishing preferential purchase rights, lock-up obligations, joint sales, drag-or-tag-along, loss coverage, right of first refusal, among others, may be developed and included into an agreement among shareholders establishing their contractual relationship.  Thus, it will be possible to determine conditions that might not be established in the by-laws and that were previously ineffectual.

At all events, those agreements will not be opposable to third parties, without prejudice to civil liabilities that might exist, and in no case will they harm the rights of minority shareholders as set forth in the paragraph added to Article 191 of the Law on Companies.

Therefore, although the conditions that the parties may establish in a contract derive from their will, it is very important to be careful with proper wording and purpose of the text to be used so that it will not be detrimental to third parties or to minority shareholders.  If any damages exist, they will be deemed null and void.

The text of the paragraph added to Article 191 of the Law on Companies reads as follows:

"Agreements among shareholders establishing conditions for trading their shares shall be valid.  However, those agreements shall not be opposable to third parties, without prejudice to applicable civil responsibilities and in no case shall they harm the rights of minority shareholders."

Now, shareholders will be able to regulate a commercial relationship at the beginning as well as during the course of the deal. They can also establish safeguards to protect their investment and they may establish mechanisms helping to prevent conflicts among the shareholders in a corporation.  A major breakthrough.   

Footnote

1 The Organic Law on Reactivation of the Economy, Strengthening of Dollarization and Financial Management Modernization was published in the second supplement of Official Register No. 150 dated December 29, 2017.

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